Global Real Estate Outlook – Edition December 2024

Economies continue to grow, with the US in particular remaining strong and brushing off renewed fears of recession over the northern hemisphere summer. The US grew 2.8% annualized in 3Q24, or 0.7% quarter on quarter (QoQ), slightly below the 3.0% annualized growth achieved in the previous quarter. The eurozone also showed decent growth, of 0.4% QoQ, while China remained weak, growing 4.6% year over year (YoY) and 0.9% QoQ. Fears over the Chinese economy prompted the government to release a large stimulus package in September, including interest rate and bank reserve ratio cuts, and support for the stock market. The package should at least prevent a further deterioration in the economy, but may not prompt a sharp rebound.

Alongside growing economies inflation has moderated, back to around 2%, and below in some countries, with the eurozone, UK and Canada all reporting sub-2% inflation for September. Going forward, we expect inflation to trend around the 2% rate but, as ever, will be subject to shocks. A further escalation of the war in the Middle East which hits oil supply and pushes up energy prices is one threat.

Against this backdrop, the widely expected cuts in interest rates across markets are now taking place, with the US Fed the last major central bank to start cutting as it delivered a jumbo 50bps rate cut in September, followed up with another 25bps in November and more cuts expected. The European Central Bank followed up on its June cut with back-to-back 25bps cuts in September and October, while the Bank of England cut by 25bps in both August and November. Japan continues to stand apart and move in the opposite direction, with another rise expected by year end.

Rate cuts should help improve the mood of real estate investors, though financing costs look set to remain restrictive in the near term at least. This is a headwind for the sector since it prevents leveraged purchases from taking place, which are standard in real estate investment, especially for large lot sizes. Borrowers increasingly rely on non-bank lenders. As interest rates decline the situation should ease, but we’re unlikely to return the widespread between real estate yields and borrowing costs which was seen for much of the post-global financial crisis (GFC) decade.

According to MSCI data, global real estate transaction activity bottomed out in 4Q23 and has been on a slow upward trend this year, though investment volumes did slip slightly in 3Q24. In USD terms and after allowing for seasonal effects, investment volumes edged down in 3Q24 in both EMEA and the Americas, while rose slightly in Asia Pacific. Globally, office was the weakest sector, and the only one to have fallen back below 4Q23. Overall, we expect global transaction activity to gradually accelerate once the market reaches a pricing investors regard as fair.
Yields and cap rates were fairly flat in 3Q24.

In a global sample of over 300 city-sector markets we monitor, yields and cap rates were unchanged in 74% of markets, fell in 10% of them and rose in 16%. According to CBRE data, notable moves included rises in German logistics yields, mirroring the weak German economy and industrial sector, and increases in prime Australian office yields. By contrast the prime Paris office yield, a key yardstick for the market, dropped 25bps to 4.25%, the first fall since 2021. However, it remained well above the sub-3% peak pricing achieved in 2021. In the US, according to NCREIF data, cap rates were pretty flat, with rises in a small number of markets, focused on the industrial sector.

In terms of capital values, apart from offices, the market looks to have bottomed out. For higher frequency reporting markets with data already released for 3Q24, capital values mostly rose or were flat across the residential, retail and industrial sectors (see Figure 1). By contrast, offices saw further significant value declines across markets, down 2.5% QoQ in the US for example.

Within the office market the stark difference between market-leading properties, with features that occupiers desire, and the rest, persists. For example, according to MSCI, in the UK falls in office capital values ranged from just 1.3% YoY for better properties (75th percentile) to 14.9% YoY falls for worse performers (25th percentile).

We expect office values to decline further in large swathes of the market as it continues to adjust to changes in the way people work. However, some employers are now more forcefully requiring staff to attend the office, sometimes on a five-day basis, providing some hope for the sector.

Figure 1: Real estate capital values 3Q24 (% QoQ)

Source: MSCI; NCREIF; UBS Asset Management, November 2024. Note: residential is not covered for Canada and Ireland. Past performance is not a guarantee for future results.

In real estate markets, downturns typically affect both prices and transaction activity, with the current downturn being no exception. Investment volumes have fallen sharply from their peak at the end of 2021, when they were boosted by pent-up demand as the COVID-19 pandemic eased (see Figure 2). The drop in investment volumes has been driven both by lower capital values, down 16% since mid-2022 according to MSCI, and lower deal numbers. Investment activity fell as the market reacted to sharply higher interest rates and seller price expectations slowly adjusted. Investors also rebalanced their portfolios while more costly and scarce debt also had an impact.

Figure 2: Global investment volumes (seasonally adjusted, USD billion)

Source: MSCI; UBS Asset Management, November 2024. Past performance is not a guarantee for future results.

In 2024, the slow road to recovery in investment activity has begun, coinciding with the commencement of interest rate cuts and a leveling off in real estate prices. Prices are reaching the point where sellers feel comfortable transacting, even if at levels which represent a significant discount to their original purchase price. A recovery in transaction activity should permeate the whole market and result in greater liquidity for real estate funds too, allowing them to sell assets to meet any outstanding redemption requests.

We expect transaction activity to recover further in 2025, though do not expect a sharp, v-shaped recovery. Several factors should support the recovery. Following strong price gains in equity markets, rebalancing effects may now work the other way as investors need to increase their allocations to real estate to meet asset allocation model targets. Improved financing conditions should allow the recapitalization of closed-ended funds which have had their life spans extended during unfavorable market conditions as the downturn has unfolded.

Investment volumes for the lower quality end of the office market, and even for better quality assets, look set to remain more lethargic. Ongoing uncertainty over the sector will likely continue to weigh on transaction activity, even though more positive noises are being heard about office use and their long-term viability. By contrast, data centers, which fall into the investment universes of both real estate and infrastructure investors, look set to account for an increasing share of investment activity.

In 2025, we expect recovery in the real estate market to take hold, and that at the global level capital values will increase 2-3% YoY in local currency terms which, accompanied by an income return of 4-5%, should give a total return of 6-7% for the year as a whole. We expect performance to be broadly similar across the retail, industrial and residential sectors, but that offices will lag and that some offices will suffer further capital value declines.

In the US, the re-election of Donald Trump as president looks set to have both positive and negative effects on the real estate market, in both the short and longer term. In the near term, a hotter US economy due to the extension of tax cuts, increased spending, looser fiscal policy and lighter regulation looks set to boost occupier demand and could lead to a pop in rental growth. However, this will likely be countered by the impact of a higher path for interest rates to counter inflationary pressures on capital markets. In the longer term, changes to tariffs and trade will also have an impact and may curb growth in the US.

In global real estate markets, industrial and logistics is the sector which looks most exposed to Donald Trump’s proposed tariff increases. A pull-back or reversal in global trade caused by tariff hikes and trade wars could see multi-nationals reconfigure their supply chains and trade volumes grow more slowly or even pull back. This is unlikely to happen overnight since it takes time for supply chains to be reconfigured.

However, investors should be aware of the impact that it may have on the logistics market in the medium term. We think it would impact the upper end of the distribution chain and impair demand for trade-focused logistics facilities at airports, ports and around land borders. The re-shoring of manufacturing to the US could also reduce demand for factories in Asia Pacic, while boosting demand for them in the US. By contrast, we think the lower end of the distribution chain will be less affected, including warehouses and facilities focused on end-delivery to the final consumer or retailer, particularly in the US.

Unlisted real estate sector performance outlook