Main asset classes Currencies Main asset classes Real estate 44 | 45 Implied policy rates in selected DM and EM economies In basis points Stay selective – 200 –100 0 100 200 Malaysia China We expect the environment for real estate to become more challenging in 2023 as the asset class faces headwinds due to higher interest rates and Asia India weaker economic growth. We favor listed over direct real estate and still prefer aiwan sectors with strong secular demand drivers. T Thailand Return prospects for global property markets are growth and lower inflationary pressures support Emerging markets Poland challenged by both higher interest rates and weaker Swiss listed real estate. We particularly like Swiss economic growth, but remain partially supported by real estate funds, as they should benefit from a EMEA an embedded inflation link through contractual rents. positive outlook for residential property markets at South Africa Higher interest rates increase the cost of financing undemanding valuations as premia to net asset and negatively impact property valuations via higher values (NAVs) have decreased to levels last seen Brazil discount rates, while weaker economic activity during the Global Financial Crisis. weighs on tenant demand for space, especially in LatAm more cyclical segments such as office and retail. On Direct real estate: Focus on rental growth Mexico a positive note, rents can be indexed to inflation or With valuations likely to come under pressure in increased by a fixed amount during the lease term, 2023, we expect investors to be more cautious providing a partial hedge against elevated inflation. when it comes to new acquisitions. In fact, Canada While listed real estate declined in the first nine prime-property yields are expected to rise by an months of 2022, direct real estate valuations proved average of 100 bp, while property values should fall Japan resilient. Indeed, we believe they have yet to reflect between 15% and 20% across all sectors by the the headwinds the sector faces. end of 2023, according to Property Market Analysis. We therefore believe that valuations should start Switzerland Listed real estate: Prefer the USA and Switzer- looking more attractive, potentially leading to land over the Eurozone and UK investment opportunities in 2024. Having said that, Valuations in listed real estate markets – at least we expect less pronounced declines in segments USA partially – reflect the challenging outlook for property with positive rental growth, such as residential or markets as multiples have fallen in 2022 and are logistics, due to favorable supply-demand dynamics. Australia now closer to their long-term average values. Logistics assets should continue to benefit from the Regionally, we expect US real estate to benefit from growing penetration of e-commerce, larger inventory Developed markets lower but still positive economic growth in 2023, as holdings as well as onshoring efforts, supporting Eurozone well as a higher exposure to sectors underpinned by demand even in an economic slowdown. Within the strong structural growth such as logistics, self-stor- office segment, we believe that higher propensity to age and data centers. In contrast, Eurozone listed work from home will remain a challenge, and New Zealand real estate is trading at a significant discount to net therefore expect higher quality assets that also asset values (NAVs) of over 50% but we expect score relatively better with respect to environmental, UK headwinds to remain considerable, especially in the social and governance (ESG) criteria to perform best. first half of 2023 as interest rates rise further while the economy weakens. The same applies to UK Hikes priced in 3M Hikes priced in 6M Hikes priced in 1Y Cumulative hikes priced in 1Y listed real estate, while more resilient economic Note Market-implied rate hikes over the next 12 months are displayed on the right and cuts on the left. The + sign depicts where markets expect rates to be in 12 months compared to today’s levels, i.e. market-implied rate hikes and cuts within the next 12 months on a net (i.e. cumulative) basis. Last data point 10/11/2022 Source Bloomberg, Credit Suisse