Outlook for global real estate turns negative: Moody’s

Amid tighter financial conditions and declining property values, the outlook for the global real estate sector is negative, says Moody’s Investors Service in a new report.

The rating agency lowered its outlook on the global real estate sector to negative from stable, saying that it sees companies facing increased credit quality risks over the next 12 to 18 months due to deteriorating operating conditions.

“Office and retail will face the greatest risks, as hybrid work arrangements persist and lower consumer spending on certain discretionary goods challenges some retail tenants,” it said in the report.

Additionally, in the U.S. market, companies face tougher credit conditions due to elevated banking sector stress, which will further limit access to funding.

While rental income is expected to keep growing by 1% to 3% over the next 12 to 18 months, “rental growth will not be sufficient to offset the negative impact of higher interest rates on the sector, which relies heavily on external capital access and transaction markets,” it said.

Higher rates translate to higher capital costs for real estate investment trusts and operating companies, it noted, weighing on their profitability and investing activities.

“In the U.S., office and lower-quality retail centers face the most severe near-term challenges,” the report said.

The operating environment will remain weak in Europe “as rising interest rates increase marginal funding costs and weaken property values,” it said.

In the Asia-Pacific region, real estate companies’ performance is expected to remain steady.

“The domestic funding environment remains supportive and most rated real estate companies have capacity to buffer higher borrowing costs,” it said.

Risks to overall economic growth are also “tilted to the downside,” Moody’s said, with GDP growth for the G20 seen coming in at just 2.1% this year and 2.2% next year, down from 2.7% in 2022.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.