A good vintage, but a small vintage
The market is split between those still fixing the problems of the past created by higher interest rates and those already investing for the next cycle. These conflicting mindsets make 2024 a transitional year, but one that could produce a good vintage of real estate investments. That said, it is set to be a small vintage considering the low amounts of capital raised and fewer assets available to buy. Value-added investment looks well-timed, and core investment can lock in high-income returns before yields decline later in the cycle.
Fundamentals make the difference
The rise in interest rates was the macro event that reset all real estate values, but real estate fundamentals should define the timing and pace of the recovery. Logistics and hotels should lead in 2024. Prime office markets also feature in the top rankings as well as logistics; both should perform well again in 2025. In terms of location, the most mature and liquid markets should lead the recovery. The UK, Netherlands, Germany, and France should attract most of the available capital from investors as repricing in these countries has been swift and extensive.
Time to measure and manage social impact
Investors are increasing their focus on the social impact of real estate investment, so they can assess it alongside environmental factors. There is a lack of global standards, but investors and managers are working together to agree on ways to measure and manage social impact across all property types, as well as focusing more investment on areas such as affordable housing and social infrastructure. This year could be pivotal in implementing a full range of ESG investment criteria.
Prime office returns to stack up against the risks
The repricing that has already occurred for prime offices leaves this part of the market looking attractive again, while the repricing equilibrium for the rest of the market is still unclear. Two types of investors could be active buyers: firstly, generalist and long-term investors looking for trophy offices at discount prices, and secondly those looking opportunistically for high returns and distressed assets who see the office market as the largest source of such deal. In both cases, investors could adapt the offices to modern occupier requirements through refurbishments or convert them to mixed-use assets.
Take your pick along the retailer supply chain
Logistics and retail properties are two parts of the same supply chain. The logistics market has been volatile but has a bias towards new stock with good lease covenants. Meanwhile, retail is starting to offer good returns relative to its risks after years of weaker performance. Investors can gain exposure to consumer trends bolstered by strong wage growth at an entry point that suits them. There should be a rebalancing between retail and logistics investment after years of investors shifting away from retail and toward logistics.
Thematic investment into healthcare and recreation
There are several common factors in healthcare, hospitality, and recreation. First, there is a definite strong demand for all. Trends that link health, tourism, and recreation – such as Europe’s ageing population and its spending habits – help form a consistent strategy that could differentiate a real estate portfolio from the wider market. Second, operator risk is a key consideration in these sectors, especially as their services need to remain affordable to avoid losing clients and revenue. However, there are also differences from an investor’s perspective, with healthcare providing stable returns, while hospitality and recreation have greater potential for enhanced returns.
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Europe Real Estate — an overview of real estate developments in European countries.
