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Real estate opportunities in 2023

11 Jan Real estate opportunities in 2023

Posted at 08:42h in Insights by

At the close of last year, many of the headwinds that buffeted the global economy in 2022 were very much at the forefront of investors’ minds.

But as we enter 2023, we at Mitiska REIM thought it an opportune time to outline some of the tailwinds we are seeing in convenience real estate, that we believe will create opportunities in retail parks, urban logistics, and multi-let light industrial both in the coming year and beyond.

#1 Safe havens in market turbulence

A key strength of real estate generally in an environment of spiking inflation is the ability to pass inflationary cost increases back to tenants via indexed leases, which serves as a natural hedge against inflation. The resulting net operating income growth also offers some mitigation of potentially rising capitalization rates.

But more specifically, it’s important to remember that not all real estate classes are the same. Last month, Savills Investment Management highlighted urban industrial, logistics and essential retail among the sectors likely to be the safest havens in 2023 due to their strong fundamentals.

We agree. For retail parks, these enter 2023 with footfall now exceeding pre-COVID levels and having retained some of the most robust yields of any sector in real estate. Offering large, flexible units with relatively low rents and easy accessibility by multimodal transport, retail parks have not only become the most convenient location for servicing shoppers’ daily needs, but also ideally suited to supporting omnichannel retailers offering click & collect orders, customer returns and home deliveries.

Nuveen Real Estate’s 2023 outlook highlights necessity, discount and convenience-based retail as likely to be a positive surprise in an overall fragile retail market. As consumers trade down, stay local and continue to require essential items such as groceries, Nuveen expects food-anchored retail parks to be a key beneficiary of these spending trends.

For urban logistics and multi-let light industrial, the supportive macro trends of onshoring or nearshoring, combined with E-commerce’s increasing requirement for last-mile distribution, have meant these sectors remain undersupplied, resulting in virtually no vacancy and upward pressure on rental levels. While firms in these sectors will likely experience lower demand due to recessionary pressures, we expect any slowdown in letting activity to be mitigated by ongoing low vacancy rates.

#2 Volatility creates opportunities

In September last year, a report from Cushman & Wakefield made the case that times of volatility create opportunities for investors and that now is the time to reassess real estate strategies to diversify and maximise returns. In its recent outlook, Savills Investment Management also stated that this time of high market stress will present opportunities to those investors with the requisite market knowledge.

We think this is especially true for value-add strategies. A key investment situation that we at Mitiska REIM aim to capitalise on are what we call contrarian opportunities in resilient retail. By keeping dry powder during volatile times, we have found significant success in making off-market acquisitions of both properties and portfolios at substantial discounts to market valuations.

With the expectation that the macroeconomic environment will improve in the coming years, investments made during volatile times can significantly boost returns. At a fund level, Morgan Stanley research has shown that both median returns and the dispersion of returns between top-quartile and bottom-quartile funds increased significantly in the vintage years that immediately followed the end of a crisis period.

#3 ESG strategies have an edge

The energy crisis has further boosted the increasing interest from all stakeholders towards sustainable and resilient assets.

We see this trend as an advantage for existing assets in our portfolio, with buyers paying a premium for sustainable properties which are future-proofed. But the same is true for potential acquisitions – another investment situation we aim to capitalise on is the opportunity to repurpose and retrofit assets which are currently in danger of being “stranded” due to their poor ESG credentials, and transforming these into modern and sustainable convenience real estate projects.

As we look forward to the coming year, we at Mitiska REIM expect to see continued opportunities in convenience real estate driven by the converging trends in retail, urban logistics and multi-let light industrial and the increasing demand for sites from a growing range of end-users. This specialist segment of the market enters 2023 with strong fundamentals and we expect its supporting tailwinds to continue to power it forward over the next 12 months.

 

Past performance is no guarantee of future results. Mitiska REIM is an alternative investment fund manager licensed by the Belgian regulator FSMA (www.fsma.be). Mitiska REIM acts in its capacity as fund manager of MEREP Light Industrial and MEREP 3 and fund advisor of FRI and FRI 2.

 Links to market reports referenced in this blog:

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