All property values fell for a fifth consecutive quarter in 2Q23. So far, the pricing adjustment has closely followed the path seen during the GFC; however, interest rate effects will be more punitive this downturn, as unlike during the GFC interest rates will not be cut back quickly.

This means that the longer inflation (in particular wage-drivencore inflation) surprises on the upside forcing central banks to keep policy interest rates elevated, the longer growth will be negatively affectedand capital shortages will persist, and in turn the longer real estate values will remain under pressure. Our expectation is for another six months of falling values on aggregate, which would take prime capital values down another 10% (Exhibit 2), although this is masking a more varying story across different sectors.

Reflected in rising prime yields, office and in-town retail have seen values fall significantly as the rental growth outlook turned even before interest rates started to rise, mainly on the back of the rise of remote working and e-commerce, respectively. As the rental growth outlook remains more uncertain, values are set to fall further, which means yields are set to rise to restore risk premiums and required returns in those two sectors (Exhibit 2).

These dynamics are less pronounced in apartments and logistics. A stronger and more certain rental growth outlook has already started to positively cushion impacts of rising interest rates, and the value correction with the corresponding outward yield shift is expected to be more moderate looking ahead.