Global Real Estate Outlook: Negotiating higher rates and other new paradigms

10 min read 29 Nov 23

With increasing talk of ‘higher for longer’ interest rates, global real estate markets are adapting to new paradigms. Property yields have risen, but not to the same degree as rates, prompting some to suggest further repricing is needed in order to restore spreads. But is real estate dependent on a wide spread over bonds to deliver performance, or can other return drivers compensate?

With ongoing inflationary pressures and other headwinds buffeting the global economy, we assess the growth prospects for rents and how they differ across regions and sectors given varied structural and cyclical trends. Investors may be drawn to growth, but are there also attractive income yields to be found? In this Global Real Estate Outlook, we explore the opportunities as well as the risks that need to be considered.

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Key trends 

Driving returns in a world after ‘lower for longer’

It’s become clear we won’t return to the rock bottom interest rates that we’d got used to. While the end of real estate’s painful repricing may be in sight (or tentatively here already in some markets), investors can’t rely on strong yield compression to drive returns going forward. Instead, we believe strategy should focus on generating returns through high income yields where available (including investing in real estate debt), or through high income growth – such as in the residential or industrial sectors. The high inflation, high interest rate era of the 1980s shows performance can be delivered even with a persistent negative spread of property yields relative to bonds, as it was compensated by strong rental growth – a beneficiary of sustained inflation given property is a real asset.

Grappling with China’s slowdown

The global economy has been in a fragile state for some time now, with many major economies having already come close to or entered recession. Recently, China’s slowdown has been adding to concerns, with its economy weighed down by issues emanating from its large and heavily indebted property sector and subdued domestic consumer spending growth. Hopes that a post-pandemic resurgence in China would benefit global economic activity have morphed into fears about how much negative impact it will have elsewhere – most obviously in the Asia Pacific region, but also further afield given the Chinese economy’s size, reach and influence.

Opportunities emerging from real estate debt amidst higher rates

The cost of real estate debt has ballooned since early 2022. Distress has so far remained at bay, but with loan covenant breaches and refinancings due over the next couple of years, it’s likely just a matter of time before we see forced sellers. While this brings pain for existing asset owners, it also brings opportunity to acquire assets at attractive entry prices. And while substantially higher borrowing costs make it more challenging to be a leveraged property owner, the higher rates charged for real estate loans mean lenders are much better compensated than during the lower rate years. In addition, with banks retreating from real estate lending in order to protect their balance sheets and utilise their solvency capital more efficiently, non-bank lenders can capitalise on the gap created, with potential to significantly grow their market share.

Not all offices are created equal

The pandemic has left a lasting legacy of hybrid working, with many people frequently working from home at least for part of their working week. This has prompted reflection from both occupiers and investors regarding offices, with many concluding that markedly less space is required. However, significant variation in the post-pandemic return to offices across the world is one reason for a differing outlook depending on the market – the pummelling that the sector is receiving in the US is not representative of what is faced elsewhere. Furthermore, there are very different prospects for well located, top-specification offices compared to weaker out-of-town assets, which are out of favour, increasingly out of tenants, and running out of time.

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The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance