WHAT RISING ENERGY COSTS MEAN FOR COMMERCIAL REAL ESTATE RISK-ADJUSTED CASH FLOWS & DISCOUNT RATES

Head or tail, the likelihood of growing energy costs having a negative impact on income-producing assets is becoming a major issue, and if no viable alternatives exist to mitigate it, it might result in a large loss of value. Energy plays a critical role in a country's economic development and industrial expansion, and any downward pressure on energy prices will affect not just the activities of power-intensive businesses, but also the household spending. The year 2022 began with high expectations and significant growth as predicted; however, the rising energy prices, growing inflation and other market anomalies, have increased overall economic risks - and possibly the country default risks and real estate market risk premiums. The current scenario is exacerbated by the difficulty of estimating the risk impact of rising energy prices on commercial real estate investment, as well as risk-adjusted cash flows, and discount rates to reflect market vulnerability. With this, market conversation is now focusing on: 1. Establishing suitable discount rates for the H1 and H2 asset valuations, taking into account the expected recovery and growth prospects, as well as the probability of the energy costs reverting to pre-2022 market level. 2. What effect will rising energy prices have on overall operating expenses and net cash flows? As well as the possibilities for compensating for asset-specific risks such as liquidity, tenant, location, property, etc. 3. Will discount rates for the first and second quarters of the year show an upward or downward trend? And, for residential, retail, industrial, office, logistics and warehousing, and trade-related assets, what is the right rate? In comparison to the values established in 2020, the core and secondary retail discount rates showed a minor recovery in 2021, at 14.05% to 15.75%. However, the unpredictability in energy prices in 2022, as well as other market concerns, might be a game changer in terms of pushing up the discount rates to be adopted in 2022 valuations. Please contact us at +234-806-877-4629, aabraham@akaa-ng.com, or www.akaa-ng.com for additional information on this topic and other real estate market information. #commercialrealestate #realestate #property #investment #development #warehousing #logistics #retail #growth #energy #power #discountrates #risks #riskadjustedcashflows #riskadjusteddiscountrates #cashflows #primerealestate #cremetrics #valuations #valuation #valuationmatters #akinabrahamandassociates #lagos #nigeriansindiaspora #nigeriainvestors #investors #realestateinvestors