The world is in a state of flux with divergent political, fiscal and monetary policies affecting economies and markets in different ways. Global trends must be weighed alongside sector and asset allocation considerations to enable active real estate managers to make intelligent decisions that will generate value for investors through this phase of the cycle.
It is worth reflecting on the past 12 months before turning attentions to what 2025 holds. We have seen elections in major economies around the world and changes in human behaviour in response to shifting structural thematics. While inflation fell across most major economies, restrictive monetary policy and the heightened cost of debt held back investment activity as bid:ask spreads persisted and real estate prices initially fell and then stabilised. But this cycle is different from the last one – the occupational sector has remained very resilient, posting positive rental growth for all sectors, even while capital values declined.
Real estate markets across the globe now appear to have reached a turning point and are showing increasing signs of positive momentum. Inflation is trending down, providing more clarity on the path of interest rates across the world, which are easing, albeit at a slower pace than initially anticipated. Global property prices have, by and large, stabilised, investor confidence is improving, and buyer and seller expectations are converging. This has resulted in increased transactions. There is, of course, divergence by sector and geography, but 2025 comes with a renewed – albeit cautious – sense of optimism for investors, occupiers and developers.
More than ever before, maximising returns will require creativity and careful stock selection. Creativity may involve securing permits for change of use, or the repositioning of standing assets through refurbishment. Stock selection must continue to favour assets which align to occupier demand (retaining ‘functional relevance’) and are best positioned within local markets. The next 12 months will not be straightforward, but times of uncertainty are often when opportunities are greatest. Those investors who can see through the current uncertainty will be the ones that capitalise on opportunities to outperform the next market cycle.
Our key takeaways for 2025
- Long-term structural trends will continue to favour thematic allocations to logistics, retail (focusing where real estate adds maximum value for occupiers) and residential. Retail remains a high-conviction sector based on our direct experience investing and managing through cycles, and we believe this area offers exciting return prospects for 2025.
The pace of recovery will vary across the globe and deployment timing will be vital to capture growth potential. Some economies will recover faster than others and offer investors more confidence, but there is a balance to be had with the impact of geopolitical events that have the potential to slow recovery.
Sustainability remains a key consideration and is beginning to influence markets in more nuanced ways, which can be leveraged to drive additional returns. For example, increased reliance on electricity means access to power is crucial, now more than ever before as national grids struggle to keep up with demand. Assets that deliver onsite power/provide enhanced energy security to occupiers and offer additional performance prospects to investors will be attractive.
Increasingly demanding consumers and occupiers will dictate the desired format and location of real estate going forward. Assets that fall below expected standards risk becoming stranded. As a result, ‘top-down’ considerations must be complimented by robust ‘bottom-up’ asset selection and the ability to effect direct asset interventions and improvements to maximise scope for outperformance.
While value-add strategies are anticipated to remain favoured by investors, the recovering market and potentially higher yield arbitrage may see a return of core and core plus capital to the market.
