What went up will come down: The golden opportunities that await cashed-up commercial property investors in 2023

By my reckoning, we haven’t long to wait. Over the past six months, central banks around the world, Australia’s included, have called time on the three-decade mega-trend of falling interest rates coupled with rising real estate prices.

In a bid to slay the inflation dragon — Australia’s inflation rate hit a 30-year high of 7.3 per cent in the September 2022 quarter — the Reserve Bank has lifted the official interest rate seven times since May 2022 and sent strong signals that it’s far from done. 

It takes time for capitalisation rates to adjust to interest rate rises, but adjust they will — the immutable laws of mathematics will have it no other way.

The great valuation reset

Though property professionals tend to be perennial optimists, it won’t be possible for owners to keep kidding themselves that the assets in their portfolios are still worth as much as they were a year or two ago, for much longer.

The great valuation reset coming our way is likely to be followed by a wave of selling, as over-exposed investment funds watch their buffers erode. Once that occurs, they’ll be forced to take action to bring their portfolios back within investment guidelines.

The bulk of punters will hang on if they can, but they’re not the ones who set prices and values. That’s done at the margins, and the decision-makers there — bankers whose view on counterparty loan-value-ratios aren’t looking so flash; portfolio managers who are seeing liquidity stripped out — will be weighing the options, to determine which assets are most saleable and will restore balance sheets to good health if shifted.

Typically, it will be the perceived B and C-grade properties that end up on the block — unless in extremis, no one likes to part with A-grade assets! — and, ironically, their owners may be forced to accept deeper discounts as a result.

Making money on the downturn

But “every hand’s a winner and every hand’s a loser”, as the late, great Kenny Rogers put it in his signature song, The Gambler.

For every investor forced to take a haircut, there’s a buyer who stands to make an out-sized profit when the market turns and prices begin climbing once more.

Having sat on the sidelines watching interest rates plummet and prices skyrocket since the onset of the COVID-19 crisis, many individuals and organisations have fortified their balance sheets and are now poised for action. They include small private players and family offices that aren’t constrained by the same restrictions as their listed brethren, along with larger funds that have massaged their balance sheets to create space for downturn buying.

Over in the UK, for example, we made a swift sale of our property valuation software platform recently to a boutique fund that needed to do some statistical modelling. The reason for their urgency? One of the country’s largest asset management firms had just dropped half a dozen properties onto the market and our clients had just 48 hours in which to submit a bid. 

Timing is everything

These sorts of swift, counter-cyclical plays can pay off handsomely, if the timing is right, and my money says we’ll see plenty of them over the next six to 12 months.

After that? With the International Monetary Fund (IMF) proffering gloomy forecasts of gathering storm clouds and the World Bank citing a heightened risk of global recession amid simultaneous interest rate hikes by central banks, a significant downturn looks likely.

Conventional macroeconomic wisdom suggests a recession, or even the prospects of a recession should reduce demand and, therefore, prices. If this plays out, that may well be the Reserve Bank’s cue to start pulling the interest rate lever. Down, this time, to stimulate the economy and boost business confidence. If that happens, we should start to see property prices move upward once more.

There are profits to be made in the interim, for investors who understand the drivers of value and have an eagle eye on the market and its movements. At Forbury, tracking those values is our bread and butter, and we’ll be watching this space with great interest as it becomes clearer and clearer that accurate valuations are the key to winning.

Peter Rose is the head of UK at Forbury.