Listed real estate sector hit hard by Ukrainian conflict and energy crisis

Bayes Quarterly Commercial Real Estate Market Monitor shows rapid decline in real estate equity and debt market for Q2 2022.

Performance from real estate equities in the second quarter of 2022 has shown a sharp slump, according to latest figures from the Bayes Business School (formerly Cass) Quarterly Commercial Real Estate Market Monitor.

In the face of increasingly strong headwinds from the worsening energy crisis, armed conflict in Ukraine, and rising interest rates, real estate was perceived to be more vulnerable than other sectors, with the European Real Estate Association (EPRA) Index losing 24 per cent compared to a fall of 10 per cent for European equities.

The two markets showing a particularly strong decline in performance were Sweden (16 per cent of the Index) and Germany (21 per cent of the Index).

With the continuation of interest rate rises since the beginning of 2022, bond market issuance had already fallen by early February after seeing a record year in 2021. In Q2, total new bond issuance was €3.7 billion compared to €18.8 billion from Q1.

Alex Moss, Director of the Real Estate Research Centre at Bayes, said:

“As can be expected during times of market sell-offs, the worst performance was seen in large and highly liquid stocks. We saw the largest stocks losing 16.5 per cent compared to a decline of only 5.7 per cent in smaller ones.

“The underperformance of larger stocks – which typically have higher sustainability ratings – have meant environmental, social and governance (ESG) credentials were not a driver of performance this quarter.

“Meanwhile, the high cost of incremental debt is forcing companies to change their business models from a debt-funded acquisition model to capital-light owner/operator.

Dr Nicole Lux, Senior Research Fellow at Bayes, said:

“Those who still issued bonds in March have already seen coupon rates 50 to 100 basis points (bps) wider than in January 2022. Index-linked rental increases may relieve some pressure on asset values, but only if these new rents can actually be paid by the tenants. Many German companies, for example, are experiencing requests from tenants to lower rents.”

The Commercial Real Estate Market Monitor aims to enhance links with practitioners and stimulating ideas for future research report, while highlighting academic expertise within the Real Estate Research Centre.

The quarterly monitor shows the direction of travel of several key factors and make informed recommendations along the way.

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