Under pressure: Global real estate recovery threatened by rising risk

In its latest report, the economic consultancy firm predicted risk-adjusted returns to be at 7.3 per cent in 2022-2023, based on the weighted average of all risk scenarios.

Inflation is seen as the biggest risk to real estate markets over the long term, which, if factored in, is seen to lower all property performance to 4.4 per cent per annum from 2022 to 2026. 

Over the five-year forecast period, the firm has a baseline forecast for all property total returns of 6.5 per cent per year.

The report noted that while real estate can serve as a hedge against inflation in some cases, it is less effective when facing cost-push inflation, which is presently perceived as the biggest threat to markets. 

Meanwhile, prolonged supply-chain disruptions are seen as the biggest long-term threat to growth by real estate firms, according to the report. 

In a supply-chain disruption risk scenario, the report stated that the impact will be felt in the first three years over the five-year forecast period, with all property returns 0.7 percentage points below the firm’s baseline forecast by 2024. The industrial sector is seen to take the biggest hit with a 2.2 percentage points decline. 

The report also raised the alarm over the potential impact of emerging COVID variants. 

While the full implications of the Omicron variant are still being assessed, a potential increase in health risks posed by the variant will lead to a “long COVID scenario”, the report warned. 

In this scenario, retail and hotels would be most severely affected in the near term. However, overall returns would be only marginally affected throughout the five-year forecast period. 

Adding to these risks, Oxford Economics associate director Christopher Babatope also pointed out that “the gloss has come off” from a previously more positive outlook for 2022 by industry players and real estate firms, who are now more uncertain about their growth prospects for the next year. 

The report cited that firms surveyed in its latest Oxford Economics’ Global Risk Survey appear more pessimistic, with an increase in perceived downside risks.

“More uncertainty surrounds near-term GDP prospects due to prevailing Delta-related disruptions, supply-chain bottlenecks, and the squeeze on real incomes from higher inflation,” he said. 

But the expert noted that there could be a light at the end of the short-term tunnel in the form of a consumer boom. 

“A spending boom is the key near-term hope,” Mr Babatope stated. 

Under a consumer boom scenario, all property returns are seen to rise 2.4 percentage points above the baseline, with the residential and retail sectors emerging as the biggest winners with gains of 6.4 percentage points and 4.1 percentage points above the baseline forecast. 

Mr Babatope explained: “Under [this] scenario, consumers run down a large proportion of the savings amassed over the last 20 months, generating a more robust, consumer-led global recovery.” 

He further expounded that as the bulk of excess savings has been accumulated by consumers in the advanced economies, these countries are forecast to see the biggest beneficiaries benefit. This, in turn, is seen to drive the global GDP rebounds to a higher level than the pre-pandemic trend.