Time for real estate
2025 looks brighter for real estate, with limited supply and growing demand.
We think the outlook for global residential and commercial real estate investments is bright. With declining and constrained supply paired with rising demand, we see opportunities in sectors including logistics, data centers, and multifamily housing. Investors should focus on strategic acquisitions and diversification to capitalize on these favorable market dynamics.
The global real estate market is poised for a promising 2025, in our view, driven by several macroeconomic factors.
Falling interest rates are expected to lower financing costs, making real estate investments more attractive. This environment should encourage increased transaction volumes and capital deployment, with over USD 400 billion in private capital ready to be invested.
The supply-demand balance is improving. Constrained new supply, due to regulatory and cost challenges, should contend with robust demand, particularly in AI-linked sectors including logistics and data centers, as well as multifamily housing. This dynamic is likely to lead to decreasing vacancy rates and rising rental growth, driving capital appreciation over the next several years.
Private real estate
Private real estate
While some investors may be reluctant to put money to work in private real estate after valuation declines, limitations on redemptions, and concerns about corners of the market (like older US office assets), we believe a brightening outlook warrants investors’ reconsideration.
First, we believe the asset class will benefit from the relief of lower interest rates. This shift is expected to boost transaction volumes, as private funds put undeployed funds to work. According to CBRE, average US capitalization rates held steady at 7% in the first half of 2024, and we expect this favorable yield environment relative to bonds to persist into 2025.
Second, private real estate managers focused on the highest quality assets may be well placed to exploit sectoral divergence. For example, many private managers are allocating to the logistics sector, which we like, thanks to its healthy rental growth, pent-up demand, and a still-constrained pipeline of new developments due to prior increases in financing and construction costs. Data centers, another area of private manager focus, offer attractive return prospects amid the AI capex cycle, in our view.
Third, private real estate valuations have undergone significant adjustments since the downcycle began in 2022 and look set to stabilize. Limited redemption real estate fund net asset values (NAVs) declined until the second quarter of 2024, but they climbed 0.25% quarter on quarter in the third, according to NCREIF data. Public REIT valuations have already bottomed out and are beginning to rise, and typically lead private valuations. This trend suggests potential easing of pressures and early signs of market stabilization, making it an opportune time for strategic investments in private real estate.
Listed real estate
Listed real estate
We also believe listed real estate stocks can deliver high-single-digit to low-double-digit total returns in the year ahead (FTSE EPRA Nareit Developed TR Index USD) for three reasons.
First, falling Interest ratesshould be favorable. Historically, real estate stocks rally 18-24 weeks before the first rate cut, with continued strong performance thereafter.
Second, appealing valuations should attract investors, with listed real estate trading at a discount to NAV. Earnings per share are projected to grow more in 2025 (6.3% versus 5.9% this year), driven by rental indexation and acquisitions. The sector's dividend yield of 3.7% is near its longer-term average (seven-year average) but should grow in appeal for income-seeking investors as the global rate-cutting cycle progresses and as bond yields likely fall in 2025.
How and where to invest?
How and where to invest?
In private real estate, we focus on perpetual capital vehicles investing generally in core and core plus assets—as a reminder, these are generally mature, high-quality properties whose returns come primarily from income generation.
We favor approaches focused on US and European assets, with the majority of assets operating in the logistics (including data center), industrial, residential, and select prime office areas. Within residential private assets, we like globally diversified approaches that focus not just on multifamily dwellings, but also more specialized fields like student and senior living accommodation. We also see appeal in vehicles that follow a triple net lease strategy (an agreement where the private managers’ tenants agree to pay a property’s taxes, building insurance, and repairs alongside their rent).
We generally expect such private vehicles to generate annual net total returns of around 7-9% (and up to 11% for triple net lease approaches) with around half to two-thirds of the total returns in the form of income payments.
In listed real estate, welike US REITs for their robust fundamentals and Singaporean developers and REITs, which are well-positioned to benefit from interest rate cuts. Hong Kong developers also present opportunities, although their REIT counterparts face challenges. Continental Europe remains attractive, but further catalysts are needed before increasing exposure.
Are you a client?
Not yet a client?
Disclaimers
Disclaimers
Year Ahead 2025 – UBS House View
Chief Investment Office GWM | Investment Research
This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.