DWS outlook: Public, private market valuations move closer together

The Frankfurt-based manager has tracked significant moves in the valuations of properties.

Frankfurt-based manager DWS Investments has been tracking significant moves in the valuations of properties in the US and Europe that could bode well for a resumption of lending and investment activity in the regions, according to a webinar held last week. 

Jessica Hardman, head of European real estate portfolio management at DWS, explained that valuations and pricing are quite near their potential bottoms, based on the company’s predictions. 

Office appraisals went down at least by roughly 21 percent as of September 2023 year over year, with an additional 11 percent price correction, according to DWS research. The second biggest valuation correction took place in the multifamily sector, where appraisals declined 10 percent. 

As prices appear to stabilize, the gap between the private market valuations and real estate investment trust securities is also narrowing. “That’s leading us to believe that the forward-looking prices of the liquid market are looking more aligned to the actual private market valuation,” Hardman added. 

This downward movement means investors could increasingly find value-add opportunities, through which they will be able to take medium risk to get an outside return, Hardman said. 

In addition, some counter-cyclical sectors could also provide risk-adjusted returns. Logistics and residential remain favorite sectors in terms of their returns’ outlook, Hardman said. “Demand from people is robust, especially in the residential and logistics sectors, where there is still an overhang of high demand and low supply.”

Other than that, repositioning assets into more environmentally friendly, sustainable properties remains a significant topic on market participants’ minds.  

“ESG is becoming more important for equity investors and lenders. [They] are also now thinking about how they want to position their book from a quality-of-asset perspective,” Hardman said.  

Macroeconomic outlook 

Johannes Müller, global head of research at DWS, said central banks’ monetary policy is still restrictive and could remain so until next year. 

“For monetary policy,” said Müller, “our belief is that we have reached the terminal rate, so we don’t expect any more rate hikes as a baseline scenario. We would see first rate cuts starting in mid-next year. However, for the time being, central banks will probably retain their hawkish language because they don’t want financial markets to ease financial conditions very materially.”

Based on DWS’s forecast, the US economy is to grow 0.8 percent next year, which would indicate a “shallow recession” with inflation rates coming down. Müller said that, despite the US economy proving to be more resilient than originally forecast, it is still expected to weaken substantially from this quarter onwards.  

Easing inflation, slow economic growth and the start of a rate cut cycle could also bolster a positive outlook for the fixed-income market in general, with expected total returns growing for all asset classes, according to Oliver Eichmann, head of rates, fixed income EMEA at DWS. 

“We expect a gradual normalization of the [yield] curve, and especially for bonds with shorter to medium term of maturity [to have] lower yields,” Eichmann added.  

Additionally, geopolitical volatility is seen as a key factor affecting capital markets entering 2024, and how that impact could trickle down to markets remains to be seen. 

“We would expect next year to be a year with some political headlines and noise for financial markets,” Müller added. 

Financial markets usually have a two-layer approach to react to political events. The first is usually a sharp increase in risk premiums when the headlines catch the market by surprise, Müller said. “Those risk premiums then erode quickly over a couple of weeks, and the second layer is that markets start to reassess what a geopolitical event really means for financial fundamentals, taxes, regulatory environment, and so on.”

During this process, the oil price and supply chains are two major transmission panels for geopolitical events to play a role in the operation of capital markets, Müller noted.