Este podcast é da responsabilidade da PLMJ. Bem-vindo ao podcast da PLMJ. Damos voz ao que interessa, ao que faz mover o país para lá da espuma dos dias: os negócios, a comunidade, o empreendedorismo, a sustentabilidade, a arte. Partilhamos saber que é feito de experiência e que serve a todos. Move-nos a coragem para imaginar o amanhã e a vontade de criá-lo hoje. Juntos, a comunidade, os clientes, a PLMJ, a Fundação PLMJ, geramos impacto. Fique desse lado. O que esperar do mercado imobiliário europeu no novo cenário macroeconómico? Que riscos e oportunidades oferece o quadro atual e como devem os investidores adaptar as suas estratégias de investimento? Onde está o valor dos ativos imobiliários num quadro de juros a subir e inflação em máximos de décadas? Este é um ciclo prolongado ou adivinha-se uma inversão mais rápida? Samuel Duah, diretor internacional de investigação no BNP Paribas, esteve no podcast da PLMJ para responder às questões do momento, no dia em que a PLMJ se juntou à Works e ao BNP Paribas numa grande conferência dedicada a refletir sobre os riscos e oportunidades do setor imobiliário. O podcast de hoje é gravado em inglês. Samuel Duah, thank you for accepting our invitation to join the PLMJ podcast. We've just heard a very interesting presentation on the real estate market and the main macroeconomic risks, and maybe that's a good starting point. Tell us about the main risks, the macro picture of the world today.

In one word, perhaps, the key thing is uncertainty. Everywhere we look now on the global space, there is some form of political and economic uncertainties, which is emerging across. And as I said in my presentation, there are three key areas in which this is coming from. One, of course, as we all know, is about the war between Ukraine and Russia. This, at a human level, first of all, it's a very tragic event. But it also have an economic dimension to it, which creates a huge amount of uncertainty as far as on European economies are concerned, particularly on the energy from that side and, of course, from there also into the wider economy. Then, we have the second element, which is in China. Now, over the past couple of years, China has been a very important part of the driver of the global economy in terms of its factories and manufacturing and keeping inflation and everything subsequently down. Now, there are three key things which is now happening in China, which likely to have negative implications continuously for the global economy and, of course, specifically also for Europe. The first is the continuation of the China COVID zero policy. Now, COVID seems to have died down now. We don't know whether it's coming back or whatever form is in, but the policy is in place in China. And what that does is actually perpetuates and prolong the disruptions in as far as supply chain is concerned. And that's one major thing that's affecting the global economy from that side. The second is China has just recently had its Congress. It's just concluded Congress, and one of the key theme that came out from that, with a new mandate for the current president of China, was that China is going to focus more on ideology rather than economic cooperation. Now, this have an implication for the world because China ideology is much more inward-looking, more than external-looking. And given that the world has been a little bit more dependent on China for a considerable period of time, that has an implication as to where to go now. And I think already, yesterday, I was reading in the newspaper about Germany, which has been quite an export, use China as a significant export destination, is beginning to rethink its relationship in as far as China is concerned. What does that mean for the German economic model of exports? We don't know as yet. So that, again, brings some degree of uncertainty there. The third phase is in terms of its current property crisis, if you'll call it that way, in China. Over the past couple of years, Chinese investors has been quite prominent also in the European scene. And with the property problems in China now, they are drawing back from this, which of course means that there's also an implication as far as European real estate is concerned. So these two places generating some degree of uncertainty. And then, of course, the last is the UK, which we've witnessed over the past couple of weeks. It is quite strange to see this from the UK. It has been a model of stable government and a bit of a continuity in terms of how we change our government. But the past couple of months have shown that there is quite a lot of uncertainty within that. So far, we've had almost about four chancellors within a space of a couple of months. We've had three prime ministers within space of two months. So it is really unsettling from that particular perspective.

Let me ask you something. It's a bit off topic, but I'm curious to know your opinion. Do you think that if the Brexit hadn't happened, it would be different?

I believe a lot of this upheaval, of course, has its roots in Brexit, because within the party which brought about the Brexit, should I say, who champion in the Brexit. It is not a unified formation around the concept of Brexit. So within the party, there's still a strong amount of division as to what to do with the Brexit situation. So that is one point. And having got the Brexit, the deal in which they actually struck for the Brexit is also a deal which brings itself another level of uncertainty, because there's a whole lot of factions within the party, which is fighting on the different sides of the Brexit situation. And I'll give you an example of that. Within the Brexit deal, there's a particular part which is about a protocol, which is to deal with how the Northern Ireland, which is part of the UK, deals with the broader Ireland, which is part of the EU. And the Good Friday agreement that was struck some years ago, which brought peace onto the island, stipulates that there can't be any physical structure in terms of border between those two places. Now, for the EU, it's complicated because, of course, in the single market, it means goods can move straight away across the border. So there need to be some mechanism that stops that without necessarily putting a physical border there. And what they came up with, together with the UK government, propositions in which it signs, was this protocol whereby the Northern Ireland remains within the EU, for some parts of its regulatory framework. Now, this is something of a no-no for some part of the political situation in Northern Ireland. And what is currently happening now is, at the moment, Northern Ireland does not have a government in Northern Ireland because the parties within it don't agree on this particular issue. And of course, it has an implication for the Conservative Party, which is governing the UK as a whole, because it is part more closer to one part of this particular faction. And within the Conservative Party, there's also a faction within the Brexit debate. So for me-

Uncertainty again

... uncertainty really is underpinned from, I think, or origination is underpinned and from the Brexit situation, yeah.

So looking at all these pain points in the world, let's go to real estate.

Mm-hmm.

What impacts do you anticipate?

I think for real estate, there's two parts. There is, of course, the capital market side of real estate, and there's the occupier side of real estate. Now, all these upheavals have significant implications in as far as the capital markets is concerned. And again, I go back to the UK, because it is an important financial hub, where there is an upheaval, it actually has a much more wider implications for the market. But of course, this is not only happening in the UK, it's also happening in other financial market, in the ECB or also in the Federal Reserve, where interest rate has been rising quite significantly on the back of inflation rising and general uncertainty within the market. Now, in the UK, of course, this is a little bit more acute because we have, as we just discussed, this has this political uncertainty or policy uncertainty at the moment in that context. Now, the real estate is priced on yields. And the yields are priced on two key interest rate mechanism, which has an important implication for this, is the government bond yields, which is the risk-free rates, and also the swap rates. Now, the swap rates is the mechanism whereby the debts on real estates are priced. Now, these two interest rates have risen considerably on the back of this. And what that means is that investors, the cost of debt for investors into this real estate is now significantly higher than what it was at the beginning of the year. So for the UK, for example, it's moved from 1% to just under 4% or just under 5%. So it's around about 400 basis point increase in that. What this means is that investors buying real estate today at the yield in which we are used to until the end of, for the beginning of the year, which in some places was some below 3%, no longer makes sense. So they will have to reprice these yields in order to be able to match their cost of debt on that particular. And this is having a couple of implications for that, yeah.

So it's all about searching for the segments in real estate where you can grab the larger yields. So where do you think there is still opportunities to invest? Do you look at commercial? Do you look at prime? Do you look at ESG factors? Where's the quality?

The opportunity now lies significantly in much more in ESG. ESG is going to be a major factor going forward in as far as occupation of buildings are concerned. In some countries now, there are legislations whereby you cannot occupy certain buildings at a certain level of energy rating on them. So ESG will become a key factor for occupation. And because that will become a key factor for occupation, it will have to become a key factor in as far as consideration, as far as investment is going to be concerned. The opportunities now will come, but until we've discovered the new level of equilibrium in real estate pricing, the opportunities will not emerge until that is actually being achieved. We are, at this point in time, in a period where we call price discovery. So investors and buyers and sellers are now trying to sort of find the common ground within this particular context to be able to set a new equilibrium yield for that. And when that happens, we are likely to have significant amount of opportunities for real estate investors to step in, particularly those who stand aside.

Samuel, but while that does not happen-

Mm-hmm

... what would you say are value-added strategies to be in the market, to remain in the market, or to grow in the market?

Yeah. If you are not for seller, then I think, and you are a long-term investor, for example, you stay in the market Because of course, you are still collecting income in as far as the real estate is concerned. Of course, the capital values of your assets moves because the yield is actually moved out. And there's also one other factor in the European real estate, and I think I showed that in my presentation today, and that is majority of the European office buildings are old and are more than 20 years old, 15, 20 years old than that. And they are unlikely, for large part of that, to meet the ESG criteria going forward. Which means that for investors to be able to rent it and things, they will have to do a little bit more of refits and repurpose and reimagine those particular buildings. And this is the strategy of value-added. So they will have to add value in this particular area. And so we think that the value-added strategies will become vogue because the ESG demand on real estate will imply that investors will have to step up in as far as reinventing these particular buildings into a lettable kind of space, in a sense, yeah.

What do you think will happen to investment volumes? Do you see different behaviors between the US, Europe, UK? Where do you see this going?

On a generalized form, we think for 2022 and 2023, we are likely to see lower level of investment volumes going forward. And I say that not because there is lack of appetite or lack of demand for the real estate, and as I mentioned earlier, it's because investors do not find where the current pricing, actual pricing, really need to be. So we are in the price discovery mode, and that is why investors are taking a wait-and-see attitude in as far as real estate investment is concerned. Now, the first part of 2022 was quite strong. We saw quite a huge amount of investment, which was bigger than what has happened in the same period last year. Now, the third quarter has been weak. The fourth quarter, we think, will continue to be very severely weak, and overall, will bring real estate's volume transactions down. We think somewhere around about 20% fall in volume for 2022 is likely. Now, this is likely to continue in the first half of 2023, and with a potential rebound in the second half. The question that remains is how big the rebound in the second half will be in order to be able to cancel out the first half of the year. So we remain optimistic for real estate in as far as the second half of 2023 is concerned.

Samuel, in a country like Portugal, we got used to living in crisis. We are always in a crisis. We have 10 years of crisis, three or four good years, and then we go back again. So when we enter these cycles, and we are in a downward cycle, the question for us is always how long will this one last? So, taking advantage of your capability of modeling the economy, share with us, how long do you think this cycle will last?

It's interesting. This is a very interesting question. Of course, the real estate cycle tend to last for probably around about five to 10 years cycle. The one before the GFC was quite a long boom of an upward cycle, or should I say a downward cycle, as far as yields is concerned. And post-GFC, of course, we had a sharp correction, which has lasted for a very short period of time, relatively short period of, probably say around about a year. And then, of course, we went on the upwards climb before the European debt crisis came along somewhere along the line. Around about five years, of course, we had a bit more of a downturn as well. But increasingly, the cycle is now beginning to become shorter and shorter-

Okay

... in this particular sense. Now, I don't really see COVID as a crisis point because it was just an event, which of course caused that. But here we are now in a bit of a downward cycle, which is not necessarily of COVID, but much more on-

More structural

... more structural-

Yeah

... if you like, on cycle. In our view, this is likely to last until the second half of 2023. At the moment, that's how we see it because, as I said, this cycle is much more in the capital market and not in the occupational market side of things. And what we are seeing is, as I said again, is the price discovery. And until the buyers and the sellers are able to find the point in the yields where they meet, we will still continue on this particular discovery. But we think probably in the second half of 2023, we'll see the meeting of eyes, so to speak, on both the investors and sellers.

We are now, more and more recently, seeing some comments on the rapidness, the quickness of the central banks increasing their rates.

Mm-hmm.

Do you think this pressure from governments because of the impact that the interest rate rises have on families, for instance, will convince the central banks to take the foot out of the gas of increasing interest rates?

I think the central banks will do that, but they will do that not necessarily as a pressure from the government side. It's much more as a mechanic situation, which will force them to really begin to take their foot off the pedal. So, for example Most people would think that perhaps the central bank reason of interest rate at this point in time is not warranted, because the cause of the inflation is more of energy crisis, which is more short-term lived. Because of course, today as we speak, the price of gas and oil in Europe is coming down significantly on the market. So you would expect inflation then also to fall. What we have seen, of course, is that not only the headline inflation, which has risen significantly, but the core level of inflation, which is affecting every day and day living of people, is also risen. And this is the mandate of the central banks. And the central banks' reaction now is to deal with this particular level of secondary effects of inflation. So as they raise interest rates, this is having an implication as far as the health of the economy overall is concerned. And as I said in my presentation, we are likely to enter into a recession probably at the end of this year and at the beginning of next year. And this recession is what will force the central banks to begin to pause and to reconsider how fast they move this particular interest rate. And they would likely to bring it down again in response to this.

In 2023?

In 2023.

Okay.

Yes. But there's two things in there. This is not driven by government, but this is driven by the reality on the economic space in which they see. That is the first one. And the second one is when it begins to come down, I do not believe that this will come down to the level that we have been used to-

Of course

... in the past. We are likely to remain elevated a little bit higher, but of course, lower than what we've just seen in recent months.

Last question, and going back to real estate, would you say it is still a safe haven for investors?

It is a safe haven for investors. Real estate, of course, all the characteristics of real estate shows that it's a safe haven relative to other asset. Of course, safe havens are relative and they are not in absolute. So in a context of shares or stocks, shares or bonds, real estate is relatively more of a safe haven. Of course, if you look at the UK gilts, which is what we call the government bonds-

Yeah

... is what we call gilts. Over the past four or five months, the value of holdings, if you held UK gilts at the beginning of the year, has fallen by almost about 50% in value. Now, this is a risk-free rate. So you would have thought because it's risk-free, you don't expect this level of falls in as far as that is concerned. So there is no absolute safe haven, and safe havens are almost always in terms of relativeness. And I think real estate provide such safe haven relatively in the context of other asset classes.

Okay. Samuel, thank you very much for joining PLMJ Podcast.

Thank you.

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