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Real Estate in 2023 4 challenges facing investors and how to overcome them

Real Estate in 2023: 4 challenges facing investors and how to overcome them

February 14, 2023

The 2023 UK Commercial Real Estate Landscape

What a difference a year makes. At the outset of 2022, there was cause for optimism in the commercial real estate sector as property prices rose, workers returned to offices, and shopping centres burst back to life. Interest rates and inflation remained low, and the economy was set for growth.

Twelve months later, it’s a different picture. The downward pressure on real estate pricing, higher interest rates, and surging inflation that started gathering pace towards the end of 2022 will continue to affect economic growth.

Here’s our take on how the key factors will shape the Commercial Real Estate (CRE) investor landscape as we strive into an uncertain 2023.

The four key challenges for the CRE industry in 2023

  • Inflation

2022 brought us record-high energy costs, spiralling food prices, supply chain shortages and increased labour costs, contributing to an annual inflation rate of 10.7% in November 2022, down from 11.1% in October – the highest we’ve seen since October 1981.

So, inflation has peaked with levels forecast to decline as we get further into 2023, evidenced by recent reductions in wholesale energy prices, fuel, and second-hand cars. However, inflation still remains a concern with the extent of the decline the subject of much debate and conjecture.

What is clear is that most forecasters predict inflation will remain significantly higher than the 2% Bank of England target. The National Institute of Economic and Social Research predicts “inflation will remain well above 3% for the whole of 2023” and won’t meet the BoE’s 2% target until 2025. At the other end of the prediction scale, the CBI expect inflation to be 6.7% by the end of 2023, with a figure of 2.9% by the end of 2024.

Whatever the final number, the combination of these factors leads to increased costs for certain real estate investments and the possibility of increased market fluctuations.

  • Rising interest rates

The Bank of England’s strategy to tackle inflation with higher interest rates is one of the biggest CRE challenges as investors seek to manage debt costs and their subsequent impact on property valuation and investment performance. Those with loans maturing in 2023 will seek to re-finance in a world where the Bank of England’s base rate is 3.5%, compared with 0.25% a year earlier.

Real estate investors must carefully manage leverage to minimise the adverse effects of increased interest rates. This involves effectively handling increased borrowing costs, strengthening cash flow, and maximising value creation.

  • Greater focus on ESG factors

Consideration of the environment, social impact, and corporate governance (ESG) is becoming increasingly important in the real estate industry. Factors such as net-zero commitments, new regulations, and the shifting of wealth to the younger generations are driving this trend.

As a result, real estate investors and owners are re-evaluating their strategies and asking questions about integrating ESG considerations into their decision-making, identifying relevant ESG risks, and creating value for all stakeholders.

  • Changes to the way we work

The pandemic has brought about significant changes in how we live and work. Real estate investors are now tasked with determining which changes will likely be permanent and which will be temporary.

Generally there’s been an increase in office occupancy with a 2022 average of 35% for Tuesday, Wednesday and Thursday, up from 28% in 2021. In London, the office occupancy rate averaged 40% from Tuesday to Thursday, with the West End seeing a rate of over 50% on the busiest days. Pre-pandemic rates ranged from 60-80%.

However, a detailed and property-specific examination is necessary as the impact can vary greatly depending on location and the ability to adapt a property’s layout. For example, office buildings in one location may fare differently than those in another, and hotels in specific tourist destinations may recover more quickly than those that rely heavily on business travel.

2023 – The year of corporate restructuring and refinancing

Things are indeed more stable following the onset of war in Ukraine and the disastrous impact of the Truss administration’s “mini-budget”. But fund managers and investors in CRE will still need to deal with a storm of volatile factors in an unpredictable economic environment.

One certainty is that corporate restructuring and refinancing will be a big topic over the next few months as higher interest rates bite harder. Institutional investors will seek to protect and, wherever possible, increase the value of their assets. This will drive them to restructure current debt or refinance to get new loans with more favourable interest rates to pay off existing debt. And with banks and institutional lenders lending less, they may well need to find alternative lenders to fill the gap.

Driving Agile CRE Asset Management

In such a changing, unpredictable landscape, CRE investors and fund managers must be highly agile in managing their portfolios to maximise their returns. With the prevalence of “con-lite” debt, particularly in more significant capital investments, investors often have little warning before acting. The old Scout motto, “Be Prepared”, has never been more appropriate.

The growth of technology in the real estate industry, known as “proptech”, is playing its part in providing agility and flexibility. Proptech is driving change and providing asset owners and investors with tools to enhance all aspects of their business, including design, construction, tenant relations, risk assessments, and financial management. For example, data analytics and AI can predict property values, identify new investment opportunities, and determine when to increase rent.

With proptech becoming more prevalent, it is crucial for real estate companies to keep up and adopt the best technology solutions to stay competitive. One such proptech growth area is the increasing use of secure data rooms specifically for CRE asset document management. Fund managers and investors can save all relevant real estate asset documents in a single, secure location.

CRE data rooms – Ready for the next deal

Coordinating and managing the large amount of necessary documentation and communication exchanged during financing or asset sales is challenging. Often, vital documents are stored in various places, with questionable levels of security and a lack of access from interested stakeholders. These can include individual PCs, company networks, cloud storage systems, hard drives, and blockchains – or a combination of these. It’s a huge task to track down and collate all the relevant documentation required to complete a transaction and present it in a secure, easy-to-access format for investors.

That’s where a virtual data room, also known as a secure data room or VDR, specifically designed to manage CRE assets, comes into its own. A VDR such as Drooms is a platform that allows for the secure storage and sharing of all asset documentation and sensitive information, such as financial documents, property management reports, ESG performance certificates, legal records, and confidential business information.

Data rooms are typically used during the due diligence process for M&A, real estate sales, and other investment transactions such as fundraising. They can also manage the critical information and communication involved with refinancing and restructuring debt, enabling fund managers to quickly secure financing or liquidate assets.

They provide a centralised location where parties involved in the transaction can access and share information in a secure and controlled environment, with features such as access controls, fast document search, document translation,  and audit trails.

Deals need to be done fast. And the 2023 market will require greater agility than ever before. Having instant online access to everything CRE fund managers and investors need to transact can help them be transaction ready in less than half the time. Time that was previously dedicated to preparing the deal can now be used to implement restructuring plans or sell assets. And this is what 2023 is about.

VDR features that can make the difference

Not all VDRs are the same.

The basic functionality may appear similar, but certain design aspects and features will give users the edge when it comes to the speed and agility of managing transactions.

1. Ease of use

CRE deals are complex and likely to contain much-supporting documentation and information. Anyone granted access to this must find their way around quickly and intuitively.

Features such as these will make the user journey easy and more likely to lead to a faster positive outcome:

  • Clean, simple design, everyday language with clear signposting
  • Easy to create fully indexed document hierarchies with drag and drop
  • Intelligent search function, with Q&As to shortcut processes and document discovery
  • Ability for visitors to leave comments and request action

2. Task automation

Some platforms have AI and automation to carry out repetitive, manual tasks and processes. This can save massive amounts of time, allowing the focus to be on making strategic investment decisions.

3. Support

There will be times when you’ll need support to manage your data room. The level and quality of support can vary from provider to provider. Key things to look out for include:

  • Do they offer multi-lingual support?
  • Is support available in the time zones you require it?
  • Does the support team have the CRE skills and knowledge level you need?

4. Accessibility

Many people may need secure data room access for due diligence, asset management and transactions. Your VDR must provide you with complete control over who can access the room and whether certain parts of the room are out of bounds.

5. Security

Not necessarily a feature, but crucial to any asset management transaction. The level of security provided by different VDR platform providers varies. Check out whether the platform:

  • uses servers that are privately owned
  • provides full encryption at rest
  • has full vulnerability management in place
  • has external security audits regularly
  • has the systems and processes GDPR compliant

Like to know more about CRE data rooms?

Drooms are Europe’s leading provider of virtual data room solutions, specially designed to manage commercial real estate asset documentation along the entire life cycle.

If you want to find out how our data room solutions can help you close your deals faster in 2023, please get in touch, and we’ll set up a demo.

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