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TIME score TIME score

TIME score - European Investment Market

Sukhdeep Dhillon • 5/20/2024

Timing Matters

For most investments, timing is crucial, and real estate is no exception. However, it’s not just about pinpointing the perfect moment to buy or sell—it’s more nuanced than that. It’s a dynamic interplay of economic cues, investor sentiment, and historical context.

The Waiting Game: Patience and Precision

During downturns, information asymmetry deepens. Fewer transactions occur, and uncertainty looms. Investors bide their time, seeking clarity before re-entering the market. We know investors are currently waiting on the sidelines, seeking the right time to re-enter the market and deploy capital.

GAIN A COMPETITIVE EDGE WITH PROVEN MARKET INSIGHTS​

As the market recalibrates, stay informed on pivotal movements—from valuation trends to investment hotspots. Anticipate changes in property values and prepare for the market rebound. Our reports provide a strategic vantage point, revealing how to harness yield expansion and navigate rate adjustments.

Contact us Subscribe for regular updates

Introducing the TIME Score

  • The TIME score detects early signals, helping investors understand improving sentiment ahead of time. It’s a strategic tool for capitalising on favorable conditions. The TIME score is a powerful tool for real estate investors.
  • It leverages past, current, and future market data and economic indicators to predict future market movements and shifts in sentiment.
  • By understanding market shifts and sentiment changes, investors can make informed decisions. Investors can use the TIME score to understand strategically when to enter or exit the market.
  • When all metrics signal an upturn, it's an ideal time to invest. Conversely, during downturns, investors may need to adjust their strategies. The TIME score helps recognise uncertain periods.
  • As we navigate the intricate landscape of 2024, informed decisions become paramount. The TIME score simplifies complex variables, making change easier to identify.
  • The European real estate market is diverse, with unique fundamentals across sectors. Adverse and favorable conditions impact each sector differently.
  • The TIME score ranks key variables for investing in commercial real estate, including the following sectors: all property, offices, retail, logistics, residential, and hospitality.

Components of the TIME Score

  1. Real Estate Investment Trusts (REITs) performance tends to precede that of private real estate by 6 to 18 months. REITs serve as a critical benchmark for comparing diverse assets across varying timeframes.
  2. Overpricing and Investment Opportunities: The degree of overpricing directly impacts investment opportunities. Overpriced markets limit entry points for investors.
  3. Repricing: As yields adjust, investors gauge market sentiment and potential gains.
  4. Stringency via Lending Surveys: tightening credit standards affect real estate activity.
  5. Liquidity and Capital Deployment: the ease of buying or selling.
  6. Cross-Border Capital and Investor Confidence: measuring the share of cross-border investments reflects investor confidence.
  7. Interest Rate Risk: interest Rate Swaps play a pivotal role in interest rate risk management, especially in financing commercial real estate deals.
  8. Risk Premium: investors demand extra compensation for taking on additional risk.
  9. Deal Dynamics: a resurgence of certain type of deals indicates renewed investor faith.
  10. GDP, employment and business investment: all a prerequisite of economic growth and business expansion.

Cushman & Wakefield TIME score

Macroeconomy

When will the European Central Bank (ECB) and the Bank of England (BoE) make the first interest rate cut? What are the market expectations for future interest rates?

Our view

  • We are ‘nearly there’ on inflation; good progress on inflation is being made, and underlying pressures of inflation are easing.
  • Both the ECB and the BoE will remain data-dependent.
  • The pricing of swaps indicates a strong likelihood that the ECB will commence rate cuts in June, we believe the ECB will lead and will begin to cut in June, followed by the BoE, expected to cut rates in August.
  • Economic growth is expected to continue at a sluggish pace.

CRE Credit, Debt Markets & Outlook

How does liquidity influence investors' access to capital, or impact their investment positions during different market conditions? How will risk impact investors’ expectations of returns? How do various factors like geopolitical events influence markets, and investors’ decision-making process? What needs to occur to enable the debt markets to loosen up? When can we expect investment deal volume to pick up?

Our view

  • The commercial real estate sector has faced significant pressure. The balance of risk has shifted; downside risks should start to dissipate.
  • In the last 18 months, euro area banks have encountered financial stability risks stemming from their exposure to CRE. Despite varying exposure levels across countries, banks are more resilient to losses thanks to larger capital reserves.
  • Stringent lending criteria from both banks and non-bank lenders is expected to continue, although we expect gradual loosening to occur over H2 2024, as stress eases, confidence rebounds, and financial sector conditions improve.
  • We are ‘almost there’ - the correction in CRE started mid-2022 and the industry has already seen a major adjustment in asset values. As rate changes have stabilised, values in segments of the market have also stabilised. This revaluation has happened faster compared to previous cycles. Looking ahead, valuations will improve as interest rates start to fall.
  • Historically, the best time to buy property is when the ECB and BoE begin to initiate rate cuts (this tends to coincide with a bottoming and inflection in property values).

Our framework for the capital markets recovery is as follows

  • Early Recovery Phase: interest rates are stable and expected to decrease soon, allowing for CRE values to stabilise. As the ECB and BoE pivot and start cutting rates (but not going back to zero-bound), the market repricing creates opportunities, offering more appealing entry points for investors, with more fairly priced market.
  • Advanced Recovery Phase: This phase is marked by increased investment and rising optimism. As the asset competition increases, we will start seeing improvements in valuations.

Where are we now?

At the turning point

According to the TIME score the commercial real estate market is in a transition phase, and the key factors for the next few months remain issues related to momentum, i.e. liquidity, as the cost of debt remains high.

Despite lingering uncertainty over the past few months, tangible opportunities are now appearing. This shift has become evident since the close of last year and is particularly noticeable in the cyclical element of the TIME score, where pricing has stabilised around the 3 score mark.

Our analysis of the TIME score shows there is a strong correlation with total returns and 12-month rolling total investment volumes. The TIME score leads total returns by two quarters. The TIME score has already identified that the turning point in real estate is here, as conditions improve total returns are poised to increase.


TIME score

The European logistics sector, well known for having repriced first and fast, is now ahead of the residential, retail and office sector. The logistics sector is making progress towards heading into the transition/early growth period where the direction of growth, activity, and sentiment will improve.

Retail, has been off the radar for a while, but the tide is turning. The retail sector is well-placed to capitalise on the evolving market dynamics. Retail has experienced a significant period of restructuring, so its current performance is based on a substantially redefined starting point.

Both office and retail sectors require liquidity and scale to improve.

GAIN A COMPETITIVE EDGE WITH PROVEN MARKET INSIGHTS​

As the market recalibrates, stay informed on pivotal movements—from valuation trends to investment hotspots. Anticipate changes in property values and prepare for the market rebound. Our reports provide a strategic vantage point, revealing how to harness yield expansion and navigate rate adjustments.

Contact us Subscribe for regular updates

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