IPM – Edition May 2024

The path that real asset owners have trodden over the last two years has been challenging. Investment volumes have hit record lows in some markets, at least in terms of inflation-adjusted figures. The bifurcation between markets’ performance has also been vast: according to MSCI¹, US offices have seen their capital values drop by more than 30% from year-end 2021, while US industrial values are up nearly 5% over the same time period. And while not as extreme, similar stories can be said for many other private markets.

Real assets are naturally cyclical, every downturn carries with it the seed of the recovery. This downturn has been somewhat special as capital values have not suffered due to a weak economy or an oversupply but a fundamental shift in interest rates. Indeed, income growth in some markets – including some office markets – has been low double-digits over the past year alone. The fundamentals of the coming recovery are there.

But there’s many a slip between the cup and the lip. Investors’ sentiment is still weak and required returns are elevated. Buyers’ and sellers’ price expectations still often do not match, affecting transaction activity. Some markets’ capital values are still correcting as appraisal values incorporate the shift in interest rates.

As always, real assets’ heterogenous nature – every asset is special – needs to be kept in mind. Savvy investors can by now, thanks to the capital value correction of the last two years, find attractive risk-adjusted returns as the new cycle begins. They are set to benefit from being an early mover as the recovery gathers pace. But some assets are likely to see further capital depreciation before they become attractive on a risk-adjusted basis.

What is the status of private markets investments? Where are the fundamentals supporting the recovery? Read on for our latest views on investments in this space.

1. MSCI US quarterly property index, 1Q24.