Where real estate should look for bright spots

COMMENT The recovery from the 2022/23 economic downturn has been slower than most previous ones, which is a concerning factor for the real estate industry and investors. However, there are reasons to be optimistic, and intelligent and measured investors and operators alike can take advantage of these bright spots. According to a panel at the recent EPRA and Bloomberg Intelligence Finance Summit, four key trends will define the mid-term future of the economy, and these will have an outsized impact on the global real estate market. Firstly, the changes to society ushered in by the pandemic will continue to define the scale and pace of the economic and real estate market recovery. The panel discussed how the shift towards remote working and the growing importance of flexible workspaces have led to increased demand for high-quality, adaptable commercial properties. Furthermore, the rise in e-commerce has significantly impacted the industrial and logistics sectors, presenting opportunities for investors. However, obvious challenges remain for portfolios overweight with less desirable and less sustainable office space. Secondly, global monetary policy will have a huge impact on the world’s economy, and this will have a profound impact on real estate markets. With central banks around the world raising interest rates, the potential impact on property investment is enormous. Rising rates have accelerated commercial bank deposit flight and led to increased moves towards money market fund assets. The panel made the point that it is paramount that monetary policymakers avoid the doom loop of liquidity concerns in the banking sector leading to the withdrawal of funding from other financial institutions. This, in a worst-case scenario, could result in the forced sale of assets depressing the price of commercial property assets, thereby reducing credit supply further and elevating solvency concerns. However, on a more positive note, industry leaders suggested that higher rates have spurred investors to diversify their portfolios, leading to new growth opportunities in alternative property sectors such as senior living, student housing and data centres. Much will depend on what central bankers do next. Low and slow The panel also spoke about the impact of a potential geopolitical decoupling between China and the US on global markets. This development could create attractive investment opportunities in emerging markets and encourage the development of innovative technologies in the property industry. However, a decoupling could also dampen the global economy at a critical time, which would be a challenging outcome for the real estate sector. Lastly, the summit addressed the low structural growth in the world economy. Despite the challenges of slow global economic growth, the resilience and adaptability of the property market were emphasised. One potential concern is the impact that tight labour markets could have on global growth – particularly in mature economies. Major advanced economies’ labour supplies are growing a lot more slowly than the pre-pandemic forecast, and CPI inflation in advanced economies remains high. UK construction wage growth is at 5.6% per year, up from 0.6% in 2012. Global output growth is declining in mature markets, and the shrinkage of working-age populations could further this. Eurozone real GDP growth is only set to reach 1.8% by 2025, while the US will reach 2.2% and the UK 2.4%. The panel acknowledged that the ageing population in advanced economies and the growing demand for housing in urban areas create unique challenges and opportunities for the real estate sector. Embrace innovation The panel concluded that the global real estate sector must navigate a complex and challenging landscape. Industry professionals must adapt to the emerging trends and challenges to maintain growth and seize opportunities. The recovery from the pandemic, global interest rates, the potential decoupling of China and the US, and low structural growth in the world economy are all factors that require astute attention and strategic planning. To thrive, the real estate sector must embrace innovation, sustainable development and diversification, ensuring a robust and adaptable industry for the future. A commitment to these fundamentals will be critical for navigating the evolving landscape and building a resilient and prosperous real estate sector in the years to come. Dominique Moerenhout is chief executive of EPRA