Global property market enters recovery phase in 2Q2024 following two years of consecutive losses due to rising interest rates. This is a promising sign for investors to revisit this asset class, which saw record-high returns in the era of low interest rates. However, the correction in values brought it back to 2018 levels globally. With the market correction nearing its end, now is the time to consider investing in real estate, as it has historically provided stable income and diversification benefits over the long term, and can offer robust returns during recovery periods. For instance, after the early 90s recession, investors saw a 76% cumulative return over the next five years. Similarly, after the tech-wreck in the early 2000s and the Global Financial Crisis in 2008, returns were 98% and 86% respectively in the following five years.
Evidence of a recovery can be seen in 2Q2024, with global value losses moderating to 0.74%, the lowest quarterly adjustment in two years. This was offset by income returns of 1.07%, resulting in a positive 0.33% return, the first positive quarter since 2Q2022. Among the 15 markets in the MSCI Global Property Index, eight saw an increase in values from the previous quarter, while six saw moderated losses compared to 1Q2024. Only Australia recorded a larger write-down in the second quarter than in the first, but this can be attributed to changes in capital values, while income returns remain stable and important in driving overall performance in the real estate sector.
Income returns have historically been a larger component of total returns in the real estate sector, highlighting the need for investors to consider both capital and income aspects when evaluating real estate investments. In 2Q2024, total returns were positive in 12 out of 15 countries, with the US and Ireland reporting flat and slightly negative returns respectively, while Australia recorded significant negative returns due to its high office vacancies and low rental yields. However, with values starting to rebound, the positive trajectory in total returns is expected to continue.
While global fundraising for real estate investment shows signs of a potential rebound after two slow years, China and Japan may face challenges. In 3Q2024, they accounted for a significant portion of cross-border inflows in Asia Pacific, with over half of Japan’s inflows coming from global sources, while most of China’s were from within Asia Pacific. However, China’s real estate market has been stagnant due to price dislocation, geopolitical risk, and lack of liquidity, making it unattractive to Western investors. Japan’s property sector is losing allure due to interest rate policies and limited cap rate compression, with the recent hike in borrowing rates by the Bank of Japan preventing cap rate compression and forcing real estate holders to rely on historically low-income yields.
On the other hand, Australia’s purpose-built student accommodation (PBSA) market and real estate debt offer attractive opportunities due to significant housing shortage and funding gaps in construction. With supply headwinds waning and demand increasing in markets such as logistics and PBSA, occupancies and rent growth are expected to rise, providing investors with opportunities to gain from increased occupancies, rents, and property values.
Investing in a condominium offers numerous advantages, including the opportunity to leverage the property’s value for future investments. By utilizing their condo as collateral, many investors are able to secure additional financing for new investments, which can ultimately lead to an increase in their real estate portfolio. This approach has the potential to greatly enhance returns, but it’s important to be mindful of the potential risks involved. A solid financial plan and careful consideration of market fluctuations are essential for successful implementation of this strategy. With a well-thought-out approach, investing in a condo can truly be a lucrative endeavor.
In summary, the outlook for global private real estate is improving, but not all markets and property types will perform equally well. Therefore, it is crucial for investors to conduct thorough research and exercise selectivity when investing in real estate, as it offers low correlations to other asset classes, strong income returns, and a degree of inflation-hedging. In an uncertain economic and geopolitical environment, additional risks are inevitable, but this applies to all asset classes. Hence, it is advisable for investors to rebalance their portfolios and consider fresh allocations to the private real estate market to achieve a strategic weighting.