Real Estate in Q3 2022 - Holocene Impact Capital

Real Estate Q2 2022

In this edition of HIC’s Real Estate Newsletter we are looking back at the third quarter of 2022 – specifically analyzing the most recent trends within the real estate industry and highlighting some of the real estate transactions that kept us busy.

We are now entering the last quarter of 2022 which historically has always been quite active. We are seeing plenty of opportunities within real estate and we invite you to drop us a note on [email protected] to discuss your circumstances and requirements – we will be delighted to assist.

Moving on, real estate trends in Q3 2022 at HIC were:

Markets adjusting to higher cost of borrowing,
Logistics, healthcare assets taking center stage,
More lenders are expanding their operations across borders.

Markets adjusting to higher cost of borrowing

Since our last quarterly report (link) the UK base rate has increased from 1.25% to 2.25%, the US Federal Funds rate has gone up to over 3% and the European Central Bank has fixed their reference rate at 0.75%.

Increased cost of borrowing has an immediate impact on the real estate market as it affects profit margins (for investment purchases) and affordability (for personal purchases). We have noticed markets adjusting two folds. Firstly, there has been an increase in supply of credit, especially within the private debt sector as higher yields are attracting more lenders. Secondly, real estate investors are now seeking higher yielding opportunities to overcome increased cost of borrowing. That means focusing more on value-add strategies as well as securing properties before they hit the open market.

Logistics, healthcare assets taking centre stage

To make the situation even more challenging, investors are expecting recession and therefore focusing on historically defensive assets such as logistics and healthcare real estate. These assets are expected to remain profitable even during the downturn, especially if investment opportunities are combined with value-add strategies. Additionally, these assets typically attract competitive financing terms and relatively high leverage. Assets that particularly stand out are distribution centers as well as nursing homes and assisted living facilities.

More lenders expanding their operations across borders

Historically we have seen that most of our funding partners were limited to a single country (or perhaps few countries in a nearby region). Now the situation seems to have changed as more and more lenders are expanding their offering to new markets. It’s an exciting development for the market as it offers funding solutions not available before.

Highlight of transactions

Below are some of the transactions that we were working on in Q3 2022:

Bridging finance for a purchase of commercial property in the UK – we are seeing a lot of these enquiries at the moment. Historically, the cost of bridging finance in the UK could easily be three times higher than the cost of traditional financing. However, in the current high interest rate environment, the difference in margins have shrunk and bridging finance has become more popular than ever – especially for clients that are constrained by time when buying assets.
Mezzanine and stretched senior loans for a development in Germany – typically offered by private capital (or specialist institutional capital) these products offer alternatives to traditional bank lending.

To sum up, it’s been quite a busy quarter, though for the time being, challenging conditions are here to stay. We are here to help our clients with navigating through this period.