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Who will end up yielding?

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Buyer-seller gap in the investment property market has widened.

It is a well-known phenomenon that growing market uncertainty serves to reduce the number of transactions. The number of willing sellers and prospective buyers may well be unchanged, but growing uncertainty about economic trends, tenant demand, movements in interest rates, or about future price trends – tends to make buyers more cautious. Nobody wants to make mistakes, and faced with increased uncertainty, a buyer is likely to adopt a more conservative approach when considering an investment case.

On the other hand: Prospective sellers often find it difficult to accept that their assets no longer carry the same value as before. More often than not, they live in the hope that market uncertainty is a transient phenomenon invariably followed by market recovery

This means that the buyer-seller gap is widening, putting a damper on transaction activity in the process.

The prevailing uncertain times have caused commercial and investment property prices to edge down slightly. By the same token, uncertainty has all but halved transaction volumes between Q3 2021 and Q3 2022.

Who then ends up drawing the longest straw? Will sellers be proven right in arguing that uncertainty will pass and the market recover? Or will buyers ultimately be proven right in arguing that prices have been excessive and need to come down further? Perhaps the prevailing market is not that bad for sellers after all, provided they remember to view a property sale in terms of proceeds, as an important part of the market-related price reduction is often weighed up by substantial capital gains on long-term mortgage loans.

History tells us that buyers are right
The market is where the market is, and the market is always right.

And when prospective buyers agree to hold back and exercise caution, buyers will ultimately be proven right. Buyers are in no hurry in a market under pressure. There will be prospective sellers that are forced to sell; they will of course eventually accept whatever price the market is prepared to pay.

However, this is not always a given. At Colliers, we are by no means convinced that the sluggish transaction activity means that prices must come down in the current scenario.

On one hand, buyers are always right. If sellers’ expectations run too high, prospective buyers take a standby position on the side lines. At some point, one seller or another will yield. Against the backdrop of a reeling economy – consensus widely seems to be that we are headed for a recession with a slowdown in activity there are plenty of good reasons why not to be overly optimistic.

This time around, however, things may in fact play out differently. 

Dwindling investment appetite typically ties in with dwindling investment capacity: If you have insufficient liquidity, and if funding is drying up, the ability and thus the propensity to invest will be weaker.

However, this is not where we are at today. Financing options may well have deteriorated: Banks and mortgage banks exercise increased caution in terms of LTVs, with rising interest rates and loan margins alike. But, and this is unusual in times of crisis, capital is abundant.

Savings are massive, property funds have accumulated vast amounts of capital, and the banking sector has a substantial deposit surplus.

In the face of great uncertainty, you tend to hold back on making investment decisions. However, capital is available in abundance, and this time it may in fact be the buyers and not the sellers that end up having to yield.

Wide range of potential outcomes
It is always hard to make predictions about the future, and right now, the range of potential outcomes is wide:

We may end up in quite severe recession. This will mean a decline in employment levels, a decline in consumer spending and a decline in investments. This is bad for tenant demand.

Nevertheless, it is to some extent feasible that the coming months will see a relatively mild recession along with a plunge in inflation. Already today, we are seeing many indications of easing inflationary pressure, and more importantly, signs of wage inflation have yet to seriously materialise in Europe.

Interest rates are therefore fairly likely to come down again. This will be welcomed by the ECB, having no doubt been seriously worried about the fallout of high interest rates in economies with high sovereign debt.

Given the massive amounts of money currently in standby position, investors may well be in a hurry to re-enter the market, should we end up with a combination of relatively light recession and rate cuts.

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Carsten Gørtz Petersen

CEO | Partner | MRICS

Aarhus

Carsten Gørtz Petersen is CEO of Colliers in Denmark with the overall responsibility for the company, including growth, organization, strategy, and organizational development. Carsten is involved in key transactions, valuation of commercial, residential and investment properties as well as property portfolios. He also offers advisory services to public and private clients.  

From his previous positions, Carsten has over 15 years of experience in the commercial real estate industry and another 20 years of experience in financial consulting, predominantly in the real estate industry.

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