Property set to cool as investors face ‘new paradigm’, Brookfield warns

Property dealmaking is set to plummet and values to fall as investors adapt to a “new paradigm” of rising rates and a global economy in turmoil, the head of European real estate for Brookfield has said.

Brad Hyler, who manages the Canadian private equity fund’s $52bn property portfolio in the UK and on the continent, said property investors had been caught cold by the rapid deterioration in the economic outlook.

“The pace of change and the shift in sentiment from reasonably positive to negative across the board has been a big adjustment,” he told the Financial Times.

That shift is chilling the property market. “Banks have gotten more selective, more risk-averse,” said Hyler, adding: “We’re expecting transaction volume to decelerate pretty significantly — it already has.”

Having entered the UK market with its purchase of a stake in Canary Wharf in 2003, Brookfield is now among a handful of North American private equity funds, alongside Blackstone, Apollo, Ares and KKR, that are increasingly dominating the trade of large European real estate portfolios.

The Canadian firm has been among the most active players in Europe in the past decade, building portfolios of laboratories and life science campuses, rental accommodation and student housing. In May it sold its UK Student Roost portfolio for more than £3bn. 

The fund also owns holiday resorts business Center Parcs, which it may look to sell soon, according to Hyler.

He is confident there will be a market for “higher quality assets”, but warned that values in out-of-favour sectors such as offices could fall sharply, with interest rates and inflation adding to property owners’ costs at the same time as the gloomy economic outlook weighs on tenant demand for new space.

Stress is likely to emerge when landlords come to refinance mortgages, warned Hyler. With rates having risen fast since the start of the year and tenant demand for older office blocks waning, borrowing costs for some could exceed income from the building.

Shares in some of the UK’s largest listed office owners were decimated last week after analysts at Bank of America turned bearish on the sector, warning that office values were likely to fall 12 per cent by 2024 and rents to flatline.

“Office stock prices are not fully reflecting the end of the ultra-low bond party, the fall in asset prices and the lack of earnings growth ahead,” said analysts at the bank, adding that “the cost of borrowing is now solidly higher than investment yields — a situation not seen since 2007”.

British Land and Workspace, both subject to downgrades by the bank, shed more than 10 per cent in a week when about £2bn was wiped from the UK listed sector.

For Brookfield, which built a roughly 10 per cent stake in British Land early in the pandemic with a view to a potential takeover approach, a repricing could open up the prospect of snapping up office assets or whole businesses.

“If things do get messy over the next six to 12 months and borrowers run into big problems, oftentimes that’s where you can find the best opportunities,” said Hyler.

Brookfield has already pounced in Europe, spending almost €5bn to take German office owner Alstria and Irish property group Hibernia Reit private this year.

Prices could well drop further, said Hyler. But he is confident that a rerun of 2008 — when property values cratered across the board during the global financial crisis — is unlikely because landlords have far less debt.

“Broadly speaking we don’t think it’s anywhere close to where it was. The banks are far healthier, leverage levels are far lower and covenants are generally a little more relaxed,” he said. “But it’s early, we’ll see what happens.”