In the second quarter of 2024, there was a positive turn in global real estate returns, marking a promising start to recovery after two years of losses. The low interest rates in the past years led to a surge in real estate values, seeing a global total return of 5.0% in the last quarter of 2021 and 17.8% year-on-year in the first quarter of 2022 – above long-term averages.
However, as interest rates began to tighten, these gains were wiped out and global values returned to 2018 levels. We believe that the correction in the real estate market is almost complete, making it a favorable time for investors to reconsider this asset class. Historically, real estate has provided stable income returns and diversification benefits in the long term, and has shown strong returns during recovery periods. For instance, after the recession in the early 90s, investors saw a cumulative return of 76% over the next five years.
In the second quarter of 2024, global value losses were at their lowest at 0.74%, indicating a moderation from the previous two years. With income returns offsetting this, global real estate achieved a positive return of 0.33%, the first positive quarter since 2022. Out of the 15 markets in the MSCI Global Property Index, a little over half saw an increase in real estate values for the first time since the second quarter of 2022. Eight markets, including Japan, South Korea, Singapore, Southern Europe, the Nordics, the Netherlands, France, and the UK experienced value increases while six markets saw losses between 0.3% and 1.5%, all of which were lower than the previous quarter. Australia was the only market with a larger decline in the second quarter compared to the first, with a 4.2% correction that brought its valuations closer to its peers. However, changes in capital values are just one aspect of real estate returns. Income returns have historically been the larger component, highlighting their importance in overall performance in the real estate sector. This also emphasizes the need for investors to consider both capital and income aspects when evaluating real estate investments.
In Singapore, the demand for condos remains at an all-time high due to various factors, one of which is the limited supply of land. As a small island country with a fast-expanding population, Singapore struggles with the scarcity of land for development. This has resulted in strict land use regulations and a fiercely competitive real estate market, where property prices continue to soar. As a result, investing in real estate, particularly in Singapore Condos, is a highly attractive opportunity with the potential for significant capital appreciation.
In the second quarter, total returns, which combine capital and income returns, were positive in 12 out of 15 countries. They were flat in the US (-0.09%), slightly negative in Ireland (-0.22%), and significantly negative in Australia (-3.07%). However, preliminary data from the NCREIF ODCE index (a capitalisation-weighted, gross-of-fee, time-weighted return index) showed US total returns turning positive at 0.25%. With values starting to rebound, we expect this upward trend to continue.
Looking at the global real estate investment market, there are signs of a potential rebound after two slow years, with China and Japan facing potential challenges. In the second quarter of 2024, China and Japan accounted for 27% and 15% of the $7.5 billion in cross-border inflows in the Asia Pacific region. Over half of Japan’s inflows were from global sources, while most of China’s came from within the Asia Pacific, particularly Hong Kong and Singapore. However, both countries are facing high debt costs and other factors that may hinder a strong recovery in real estate capital inflows.
China’s real estate market has seen a significant decline in demand from Western investors due to geopolitical and economic concerns, and this is unlikely to change in the near future. The market has been stagnant due to price dislocation, geopolitical risks, and lack of liquidity. Since 2021, China has had a property crisis, which was made worse by the collapse of Evergrande. Due to these risks, many European investors are avoiding China and Hong Kong despite potential returns. Additionally, China’s domestic property crisis continues, with high office vacancies and low rental yields, along with other issues with failing developers and government interventions.
Japan remains an outlier in interest rate policies while major markets like the US have seen a decline in interest rates to boost property investment. Japan’s broader property sector is losing its appeal due to this and limited cap rate compression. In July, the Bank of Japan raised borrowing rates for the first time since 2007, reducing market attractiveness. This hike has prevented cap rate compression, meaning property prices haven’t risen, forcing real estate holders to rely on historically low-income yields. However, senior housing remains an attractive niche in Japan due to its aging population, with 29% aged 65 or over. These assets are small, requiring an amalgamation play by investors.
Australia’s purpose-built student accommodation (PBSA) market has a vast potential due to a significant housing shortage. Only 20% of students in Melbourne and Sydney can be accommodated by universities, forcing the rest to seek private rentals. Additionally, real estate debt in Australia offers appealing risk-adjusted returns. There are funding gaps in construction, with many developers unable to secure bank financing. We are looking at sectors like logistics or PBSA, where we see long-term growth opportunities.
With stabilizing fundamentals and transaction market pricing, the real estate market is likely near its bottom, but this doesn’t necessarily mean it’s an attractive entry point. For prices and valuations to increase, we would ideally see declining interest rates and stronger property fundamentals. Most developed market central banks are starting to taper interest rates, which should put downward pressure on financing rates, discount rates, and property capitalization rates, thereby boosting the value of real estate assets. The pullback in construction activity across sectors bodes well for property fundamentals in the medium term, with markets with strong demand due to population growth or structural changes, such as e-commerce, expected to see increased occupancies in the medium term. This trend also highlights the opportunity for investors to gain from increasing occupancies and rents, leading to a rise in property values. While there may be challenges along the way, we believe that the real estate market is looking up, presenting excellent investment opportunities for investors who do their research and are selective when investing in real estate. This is especially important as not all markets and property types perform the same way.
In an uncertain economic and geopolitical environment, risks are inevitable, but this applies to all asset classes. Over the past two years, the weight of real estate in investors’ portfolios has significantly decreased due to resetting real estate values and a record stock market. Today, investors may consider investing in the private real estate market to achieve a strategic weighting. In the long term, private real estate offers low correlations to other asset classes, strong income returns, and a degree of protection against inflation. While there may be hurdles, the outlook for global private real estate is improving, and it’s an opportunity for investors to rebalance their portfolios.