Property set to cool as investors face ‘new paradigm’, warns Brookfield

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Real estate transactions are set to tumble and values ​​fall as investors adjust to a “new paradigm” of rising rates and a global economy in turmoil, Brookfield’s European real estate chief said.

Brad Hyler, who manages the Canadian private equity fund’s $52 billion property portfolio in the UK and on the continent, said property investors had been taken aback by the rapidly deteriorating economic outlook.

“The pace of change and the shift in sentiment from reasonably positive to negative across the board has been a big adjustment,” he told the Financial Times.

This change cools the real estate market. “Banks have become more selective, more risk averse,” Hyler said, adding, “We expect trading volume to slow down quite significantly – it’s already happening.”

Entering the UK market with its purchase of a stake in Canary Wharf in 2003, Brookfield is now one of a handful of North American private equity funds, alongside Blackstone, Apollo, Ares and KKR, which dominate in growing trade of the major European real estate companies. wallets.

The Canadian company has been among the most active players in Europe over the past decade, building portfolios of life science labs and campuses, rental housing and student accommodation. In May he sold his UK Student Roost portfolio for over £3billion.

The fund also owns resort business Center Parcs, which it may consider selling soon, according to Hyler.

He is confident there will be a market for “better quality assets”, but warned that values ​​in disadvantaged sectors such as offices could fall sharply as interest rates and inflation drive up the costs of utilities. landlords at the same time as the gloomy economic outlook is weighing on tenant demand for new space.

Stress is likely to emerge when homeowners come to refinance mortgages, Hyler warned. With rates rising rapidly since the start of the year and tenant demand for older office buildings waning, borrowing costs for some could exceed building revenues.

Shares of some of the UK’s largest listed office owners were decimated last week after Bank of America analysts turned bearish on the sector, warning office values ​​are set to fall 12% by 2024 and flat rents.

“Office stock prices do not fully reflect the end of ultra-low bond night, falling asset prices and the lack of earnings growth ahead,” analysts at the bank said, adding that ” the cost of borrowing is now solidly higher than the returns on investments — a situation not seen since 2007”.

British Land and Workspace, both subject to downgrades by the bank, fell more than 10% in a week as around £2bn was wiped out of the UK listed sector.

For Brookfield, which acquired a roughly 10% stake in British Land at the start of the pandemic in view of a possible takeover approach, a price revision could open the prospect of acquiring office assets or entire businesses. .

“If things get messy over the next six to 12 months and borrowers are in big trouble, that’s often where you can find the best opportunities,” Hyler said.

Brookfield has already surged in Europe, spending nearly 5 billion euros to privatize German office owner Alstria and Irish property group Hibernia Reit this year.

Prices may well fall further, Hyler said. But he is convinced that a repeat of 2008 – when land values ​​rocketed across the board during the global financial crisis – is unlikely because landlords have far less debt.

“Generally speaking, we don’t think he’s anywhere near where he was. Banks are much healthier, debt levels are much lower and covenants are generally a bit looser,” he said. “But it’s early, we’ll see what happens.”

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