Watchers of the broader global economy are becoming increasingly twitchy about the future of commercial real estate (CRE) as an investable asset class.
The general consensus seems to be that work-from-home is now a permanent feature – with many societies growing to accept that most office workers will spend somewhere between two and three days in the office and the rest of the week working from home.
Knight Frank found that around half of the large multinational responders to a recent survey intended to cut office space significantly in the next three years.
The short-, medium- and long-term effect that this may have on CRE valuations is yet to play out, but some observers fear the worst and that a crash is imminent. Other pundits are far more sanguine, including Fitch Ratings.
In a recent note, the ratings agency said of the European market, “Insurers’ ratings are likely to be resilient to a moderate fall in CRE … although a systemic crisis would put greater pressure on individual issuers with larger exposures.”
One of the core questions is how much commercial real estate insurers have invested in via the asset management side of the business. When looking at the European insurance sector, Fitch said, “European insurers’ CRE exposures amounted to 4.1% of aggregate EUR11.5tn assets at end-3Q22, of which direct CRE investment exposure comprised EUR202bn, or 1.8% of total assets.”
No comparable figures are available for insurers in the MENA region, but real estate investment has often been the darling of investors here. There seems little doubt that there is a looming risk for CRE as interest rates rise.
The US, often at the sharp end of global property turmoil, has seen some banks selling their property loans at a discount because of a predicted drop in asset values. Goldman Sachs is reported to have been hammered by delinquencies on real estate loans in 1Q, partly attributed to Elon Musk refusing to pay Twitter’s rent.
The Wall Street Journal recently wrote, “Some of New York’s best known real-estate developers are unloading their least valuable office buildings at deep discounts.” The Federal Reserve’s May meeting minutes said, “The staff noted that the CRE sector remained vulnerable to large price declines.”
Readers in the Middle East with long memories will recall that back in 2007 there was an increasing number of strident headlines about the US ‘subprime crisis’. Within a year the subprime crisis had metastasised into the global financial crisis in which virtually every asset class saw valuations fall.
The irony is that the global financial crisis led directly to quantitative easing which eventually caused asset bubbles. It is the CRE asset bubble that looks most at risk of bursting as quantitative tightening sees interest rates head ever upwards in a bid to calm rampant inflation.
Insurance asset managers in the MENA region have been through many crises before – including real estate crises – and so have some experience in dealing with the fallout but there is still much wisdom in the phrase ‘forewarned is forearmed’.
Paul McNamara
Editorial director
Middle East Insurance Review