Real estate outlook 2024 | Investment outlook (2024)

Great variations amongst global markets

As we look across the global landscape, there are some common themes: inflation is moderating but sticky, interest rates remain elevated, value losses are subsiding, investment volumes are near 10-year lows and transactions arising from distress have remained muted despite pressures. However, we also see a lot of variation:

1. Valuations: Values in Asia Pacific are holding up better than Europe or the U.S.
2. Office markets: The office market is not the same everywhere, and we expect the factors behind this divergence to continue. There’s also great variation within markets
3. Climate risk and ESG: The significance of climate risk and environmental, social and governance (ESG) factors in investment decision making varies by region, with European and Asia Pacific investors more unified in their approach to this than their U.S. counterparts

What’s cyclical and what’s structural?

We believe several trends are driving structural and cyclical changes for real estate in the long term. These include:

1. Generative artificial intelligence (AI)
2. Battery/chip manufacturing
3. Alternative property-types
4. Transition to the low carbon economy
5. Aging populations

Refinancing creates challenges, also opportunity

Interest rate increases since 2021 are raising the risk of upcoming refinancings for maturing commercial real estate (CRE) loans leading to loan impairments, collateral enforcement and distressed sales. But there are mitigating factors that will limit the downside:

1. The industrial and apartment sectors in the U.S. and U.K. are likely to have seen valuation growth over the course of the loan, so LTV ratios at maturity should be lower than at origination
2. The lower LTVs in the recent cycle mean the amount of debt due for expiry is a lower share of the market than we saw during the global financial crisis (GFC)
3. Lower leverage meant that the equity cushions that are built into the lending process were larger than in the GFC, so the risk of distress was lower

Because of this, we can expect to see a rise in distressed sales due to refinancing problems, but not a tsunami. Further, this could provide opportunities for alternative lenders to lend at relatively modest LTVs but at much greater returns.

Retail could be a quiet outperformer

While nuances exist across regions, we maintain high conviction around necessity retail. We believe this segment will outperform in the face of a fragile global economy. As consumers continue to require essential items, trade down, and stay local due to hybrid work, we continue to focus on the retail formats which benefit from these trends.

1. U.S. retail: Grocery-anchored and necessity-based retail is seeing all-time low vacancies in the U.S.
2. European retail: Retail parks (grocery-anchored and convenience retail assets) located outside of the urban core have generally healthy fundamentals today and offer attractive investment opportunities
3. Asia Pacific retail: Grocery-anchored, sub-regional malls and convenience retail are interesting propositions in this current macro climate, especially if pricing adjustments allow for an attractive entry point

Continued need for affordable housing

While the lack of affordable provision has been growing for decades, most recently inflation, rising interest rates, a pause on housing developments and increased demand has exacerbated the problem and the need for affordable housing is more pressing than ever. The problem is a global issue, but the solutions will vary country to country.

To solve for the problem, there is a requirement for stronger private and public partnerships (especially outside the U.S.) with viewed increased opportunities for investors within the sector.

Setting up for a good vintage

Values have come a long way to adjust to the new financial market environment and we expect that, save for additional unexpected negative macro shocks, most investment markets will have bottomed out by end of 2023.

There is too much uncertainty to expect interest rates to improve markedly in the short run, but over the medium term, more accommodative conditions should support property values again.

However, even with a more pessimistic outlook on interest rates, 2024 is setting up to be a good vintage for real estate. Market dislocation, not least caused by debt workouts, will unlock opportunities for well-capitalized investors.