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There is now no shortage of voices claiming private real estate fund values have bottomed across the board. But not all properties are equal in this regard. Persistently low property yields below borrowing costs signal that the values of popular property types such as warehouses, apartments and storage facilities need to fall further. We have rarely seen negative leverage scenarios with happy endings.
Private real estate returns have turned positive for the first time in two years. And while a total return of 0.3 percent, as measured net of fees by the NCREIF Fund Index – Open-end Diversified Core Equity (NFI-ODCE), is modest, we believe the turnaround is notable. For one thing, we believe the recovery will be inconsistent across property types, and that some specific property types may even have further to fall.
Real estate is being repriced as investors come to grips with a new cost of capital and slowing growth. We see the economic regime shift creating the potential for strong vintage returns. The turning of the economic cycle to a decelerating growth or contracted environment, higher financing costs and tighter availability of financing are shifting the private and listed real estate landscape under our feet.
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