Instead, we expect the upcoming cycle to be Some buildings will become stranded as landlords relatively short. If interest rate levels begin to can no longer lease them unless they meet stabilise, we believe that most valuations will minimum standards. This will increase not only the readjust by the middle of next year. As the market ‘brown discount’ for non-compliant buildings but moves closer to the bottom, there will be some also the scope for the most sustainable buildings interesting opportunities for investors with long- on the market to attract outsized ‘green premia’ term capital to deploy. in the near term, especially as buildings with the strongest credentials are in short supply. The biggest differential may An eye on cashflow arise between buildings that are Finally, 2023 will be the year that the pricing sustainable and those that are not. landscape in the real estate market goes back to basics. After almost a decade of chasing ever-compressing yields due to the increased A return to rational pricing allocation of capital to the sector, we’re now entering a period where the focus will be on Indeed, we should see a fundamental cashflow - maintaining income where you can strengthening of terms in 2023. After a long and growing it where opportunities to pick period of low interest rates, during which a up higher-yielding assets arise. The focus on lot of real estate seemingly offered the same delivering alpha will remain but this will be much standardised yield almost regardless of quality, more a function of the quality of the building, and we’re now moving into a period of more rational the ability of the manager to actively manage it, pricing. This creates the potential for more than it will be of past drivers like historically low differentiated returns between sectors, property rates or prime locations. types, and locations that active real estate investors can take advantage of. Sustainability premia set to increase The biggest differential may arise between buildings that are sustainable and those that are not. Not only has the energy efficiency of a building become more important as energy costs have risen, but evolving regulation is continuously ratcheting up sustainability standards. With an alphabet soup of requirements from EPC ratings to Sustainable Financial Disclosure Regulation coming thick and fast across Europe especially, the next few years will bring huge opportunities and risks for those who can get ahead of the changes and those that get left behind. 20 Investment Outlook Fidelity International