IndustryIssue 02 - 2024MAGAZINE
GBO_ Real estate

Real estate investors eye promising 2024

Most real estate sectors in Europe and the Middle East are predicted to see modest increases in investment activity or little change from 2023

Real estate investors anticipate a more promising 2024, with the hopes around post-COVID recovery and the expectations of monetary policy easing likely resulting in some positive movements in the sector.

PwC sums up the current sentiment in the following words, “Real estate leaders are slowly becoming reconciled to a higher interest rate environment, while grappling with more fundamental challenges around the industry’s role in society, including making buildings fit for purpose in an uncertain future.”

PwC’s survey respondents (mostly the senior industry players); believe there is potential for renewed investment activity following greater clarity on monetary policy in the United States, Europe and Asia-Pacific. Translate things further, it means that the sector will see increased activity, with higher yields, an increase in prime rents, and repricing beginning to reset buyer and seller expectations.

Gauging the sentiment

A section of the analysts have the hope that buyers and sellers will accept a higher-for-longer interest rate environment and will therefore find the middle ground on pricing that has been so elusive over the past two years.

“With alignment on pricing comes the belief that real estate can recover from one of the worst investment downturns in years, although any upswing in activity is expected to be much more pronounced in 2025 than in 2024. But there is still a fair degree of caution in real estate, and diversification of risk by market and by sector will be critically important,” PwC stated further.

While interacting with Global Business Outlook, Itzhak (Zahi) Ben-David, PhD Professor of Finance at the Ohio State University and the Neil Klatskin Chair in Finance and Real Estate at The Ohio State University Fisher College of Business, stated that economists generally think about global real estate market in 2024 with cautious optimism. However, the key issue is the high debt born by the commercial real estate sector and the weakness of offices.

According to Savills market report, around 52% expect prime office investment to rise in 2024, around 72% expect logistics rents to grow further, and around 85% expect capital values in the living sectors to increase next year.

The outlook for real estate around the world is getting better. Most real estate sectors in Europe and the Middle East are predicted to see modest increases in investment activity or little change from 2023. The majority of respondents do not anticipate a decline in activity, suggesting that the worst of the contractions brought on by interest rate increases is likely over.

The residential markets, especially the multifamily sector, where demand exceeds supply in many areas, are the ones with the greatest optimism regarding activity. Strengthened by solid foundations, the logistics real estate market appears poised for success in 2024.

For offices, however, the picture is more mixed, particularly outside the prime sector, where 16% of respondents in the report anticipate a drop in investment activity in the upcoming year. In general, 5%–10% of participants predict a significant increase in investment activity.

Meanwhile, according to Ben-David, economic conditions influenced the real estate market showing resilience.

“Economic conditions are showing resilience, with growth expected to be strongest in major Asia Pacific countries, especially India. The measures that central banks took against inflation are taking effect, with some expectations of interest rates peaking and potentially a soft landing. The real estate market is experiencing a mix of macroeconomic challenges, including inflation, recession risk, and geopolitical instability,” Ben-David said.

Prime office and logistics outlook for 2024

According to Savills Research, yield corrections are anticipated to increase throughout sectors and regions in the upcoming year due to persistent differences between seller and buyer expectations.

In many major global cities, respondents anticipate an increase in the yields from the prime office sector. But after these modifications, yields should progressively stabilise because interest rates have peaked and the outlook for investment activity is more favourable.

Except for Dubai, Singapore, and Tokyo, which continue to provide investors with strong cash-on-cash returns, an increase in yields is also anticipated in all US, Asian, and European logistics and manufacturing hubs.

Moreover, technology will help investors and the real estate landscape to adapt to these changes in 2024. But there will be challenges ahead, according to Ben-David.

“Technology, especially AI, is reshaping the global real estate landscape by enhancing efficiency in operations such as marketing and leasing. But it doesn’t always work well, see Zillow attempt to purchase homes based on their own valuation model,” he stated further.

Talking about real estate, market situations and technology affecting it; we have the example called Europe, where the rise of disruptive forces like AI, backed by solid growth in hospitality-related sectors, are poised to drive the continent’s commercial real estate market in the coming days. However, on the ground, the housing market faces the test to get back on its feet, amid the soaring rental market.

European real estate investment is at a decade-low, and while analysts betting 2024 to be the year of turnaround for the sector, borrowing costs need to shrink and the economies across the region need to rebound. And last but not the least, the interest rate needs to cool down. The last scenario is important, as the European real estate sector largely relies on borrowing.

Deloitte sees the property sector as being close to “getting back on solid ground.” In its global outlook for 2024, the accounting firm surveyed sector leaders and concluded that “the coming 12 to 18 months are expected to be important as real estate firms reposition themselves”.

However, as per Deloitte, two-thirds of the European industry leaders are expecting revenues to fall, which in return will warrant situations like cost cutting. Another priority will be to meet environmental, social, and governance (ESG) regulations, and modernise technological capabilities to prepare for the changing conditions and demands in the market.

Top sector picks by investment strategy

Despite the challenges in the sector, prime offices remain the top pick for core and core plus strategies, especially across the Asia Pacific region, closely followed by prime logistics in most markets.

The residential sectors in cities, where supply cannot keep up with the growing demand for rental accommodation, as well as the premium hotel and retail sectors in popular tourist destinations in Southern Europe, Singapore, and Australia, offer substantial opportunities.

Office or retail space with the potential to be repositioned or retrofitted for higher rental returns is a key component of value-add strategies. Repositioning offices in desirable locations in the Netherlands, Spain, Japan, South Korea, Australia, France, and Germany, as well as retail spaces in southern Europe and Asia, offer substantial opportunities for value addition.

Properties with development and repurposing potential may be of interest to investors seeking more opportunistic investments. This could entail renovating outdated shopping malls or turning offices into residential and hospitality spaces. The significant investment potential of smaller and less liquid sectors like data centres, life sciences, and education is supported by strong drivers of demand and constrained supply.

Total value of global real estate

The total value of all property in the world was $379.7 trillion, by the end of 2022. Despite being 2.8% lower than 2021, the longer-term trend indicates that property continues to be a significant store of wealth globally, rising by 18.7% over the previous three years.

Real estate is nearly four times the size of the global GDP and has a value greater than the combined value of the global bond and equity markets. In contrast, the value of all the gold that has ever been extracted, $12.2 trillion, is meagre and represents just over 3% of the value of all real estate on the planet.

Residential property will account for slightly more than three-quarters of the total real estate value, or $287.6 trillion, by the end of 2024. Around 11% is made up of agricultural land, and the remaining 13% is made up of commercial property.

The past year turned out to be a year of contrasts. Before rising interest rates and escalating economic uncertainty dampened global residential and commercial markets, valuations held up in the first half of 2023. This trend has persisted into 2024.

In 2023, residential real estate experienced a 1% decline; however, over three years, from 2019 to 2022, its growth rate of 21% was second only to that of gold. During this time, ultra-low interest rates and the emphasis on the home during the lockdowns related to the COVID pandemic helped to boost residential values.

Despite a slight decline of 1.8% in 2022 due to weaker conditions in the second half of the year, commercial real estate saw a 14.4% increase over the three years. This was primarily brought about by the government stimulus and low interest rate environment, which encouraged investors to put more money into real estate.

In 2023, agricultural land decreased by 11.4% on an annual basis, but increased by 8.8% over a three-year period. Values of agricultural land were negatively impacted by the pandemic in 2020, but they sharply recovered in 2021 before faltering in 2022.

According to Ben-David, the bond and equity markets suffered along with a decline in real estate values. Equities experienced a 20.3% year-over-year decline, while debt securities shrank by 3.2%.

“Commercial real estate, especially offices, suffers a lot these days. It will be interesting to observe how this evolves in 2024. The major issues are the higher interest rate, loans that are becoming due and low demand for office space due to work-from-home trends,” Ben-David said.

Impact of environment on real estate

According to Ben-David, the built environment is greatly influenced by the real estate sector, which also has a major effect on the surrounding natural area. Growing awareness of how real estate development affects the environment and a move toward sustainable practices has been observed in recent years.

“ESG-related considerations become an important factor influencing decision-making, e.g., retrofitting or repurposing buildings. The shift is not just about compliance; it’s about understanding the value ESG investment adds to real estate assets,” he added.

In an article, Junaid Kanth, Vice President of Valuation and Strategic Initiatives stated that a major worldwide issue that has an immediate impact on the real estate sector is climate change. Properties situated in susceptible regions are at risk from rising sea levels, extreme weather, and shifting weather patterns. Climate resilience is becoming more and more important to real estate developers and investors when making decisions. Property values and investment decisions are increasingly heavily influenced by variables like flood zones, storm surge risks, and long-term climate projections.

In real estate development, energy performance evaluations, building codes, and certifications like LEED (Leadership in Energy and Environmental Design) have become crucial factors. Energy-efficient buildings are more appealing to investors and tenants because they not only lower carbon emissions but also save residents money by lowering their energy bills.

Real estate projects are also integrating waste reduction techniques, rainwater harvesting, recycling systems, and water-saving technologies to reduce their environmental impact. These actions not only help the environment but also save money and make properties more appealing to buyers.

According to Junaid Kanth, sustainable and ecologically conscious real estate is in greater demand. Sustainable practices and environmentally friendly features are becoming more and more sought after by investors, tenants, and homebuyers. Properties that are close to green areas, have green certifications, are easily accessible by public transportation, and have energy-efficient designs tend to command higher market values and draw in a wider pool of prospective tenants and buyers.

The final prediction

Also, the real estate industry is experiencing a significant surge in sustainability due in large part to government regulations and policies. Energy efficiency guidelines, building codes, and incentives for sustainable development have been implemented by numerous jurisdictions. These rules incentivise developers to use sustainable building methods and support ecologically friendly practices. Keeping up with regional laws and taking advantage of incentives can provide you with a market edge.

“In order to ensure the real estate industry survives into the future, it is imperative that the environment be managed sustainably. The way real estate projects are planned, developed, and marketed is being influenced by a number of factors, including market demand, energy efficiency, biodiversity preservation, resource conservation, and climate change. Adopting sustainable practices helps to meet the changing needs of investors, tenants, and buyers while also having a positive economic impact and reducing environmental impact. The real estate sector can help create a more resilient, sustainable, and greener future by emphasising sustainability,” Junaid Kanth concluded.

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