Real estate has been through something of an evolution in recent years. Technological disruption, the rise of sustainability, new regulation, shifting investor behaviours and changing working patterns have all turned real estate as an investment opportunity on its head. As part of our ‘Real Estate from a New Perspective’ series, Ian Horswell, Head of Business Development, Funds, EMEA & APAC, explores the key drivers shaping the real estate investment space…
Q: What are the key trends shaping real estate investment?
There are several key trends shaping the real estate market. The global economic outlook in particular remains a critical factor with interest rates, inflation and GDP growth all influencing investment decisions. There is, however, cautious optimism about a recovery in investment activity; the suggestion is that UK prices have reached the bottom while cross-border capital flows are expected to recover.
From a sustainability perspective, investors are increasingly opting for eco-friendly buildings and environmental credentials, including energy efficient designs, green certifications, being BREAAM compliant and the use of renewal sources. These are investors with an eye on the long term.
Of course, technological progression is revolutionising all areas of our lives and that is no different in the real estate sector – from the rise of ‘smart buildings’ through to investment analysis, where technology and AI tools are improving efficiency and decision making. Consequently, data centres are increasingly in demand to meet the growing needs of a digital infrastructure.
Meanwhile the tokenisation of real assets is on the rise and an area of significant evolution. Though a global phenomenon, we are seeing the Asian market in particular driving this trend.
Q: How significant is the post-pandemic influence on the commercial market?
The post-pandemic influence has been significant and has led to several notable shifts.
The adoption of remote and flexible working through Covid-19 in particular has prompted many companies to review their office space requirements as they move to a hybrid model. This has led to a sizable decline in the value of office space - in the US the market has reduced by 20% since 2019. As a result, vacancy rates have increased in most major cities prompting commercial spaces to be adapted into residential or mixed-use developments.
In addition, greater emphasis on health and safety in office spaces has expanded the use of technology with, for instance, smart ventilation systems and touchless technologies.
Q: The past year has been tough on fundraising. Is there light at the end of the tunnel?
High interest rates and persistent inflation have made for a challenging situation over the past two years but there are grounds to be positive. For one, the economic outlook is encouraging with inflation rates edging down and creating more favourable economic conditions for investors. And, although interest rates are likely to stay high, the Bank of England has already introduced one cut with further cuts hopefully on the cards for the latter part of the year and into 2025.
This should stimulate greater activity in the market, and we are already seeing signs of this with our clients at Suntera. Although office and retail spaces may continue to face challenges, the industrial and residential sectors are set to bounce back providing they respond to the shift towards high quality and energy efficient principles.
Q: Are there any geographical markets that are performing particularly strongly?
There are several geographical markets currently showing particularly strong trends in real estate investment. The US continues to be a hot spot, particularly in suburban areas and cities undergoing revitalisation. The focus in the US market is on sustainable practices and affordable housing initiatives.
In Europe, Germany, France, the Netherlands and the UK are seeing robust occupier demand and rental growth. Whilst Spain has a strong economic outlook, it faces issues with elevated supply levels.
The Asia-Pacific region, meanwhile, is leading on performance, with growth in cities like Tokyo where multi-family housing and retail rents are on the rise. It’s a similar story in Singapore, where not only has limited supply driven prices higher but there is also considerable investment from Hong Kong and China high net worth investors.
Q: How are commercial and residential investment opportunities perceived?
Both asset types have their own advantages and challenges, with allocations being based on factors such as risk, return, and market conditions.
Commercial assets typically, for example, offer higher rental yields compared to residential properties, due to longer lease terms and the potential for higher rent whilst also presenting a more stable income stream. However, investing in commercial real estate can be complex, requiring a deeper understanding of the market and property management.
On the residential side, lower entry costs often mean this is a sector that is more accessible to individual investors, whilst residential properties are also generally easier to manage and sell compared to commercial. At the same time, population growth and urbanisation are ensuring a consistent demand for residential assets, whilst residential property can also be more sensitive to economic changes and interest rate fluctuations.
Both sectors will continue to attract investment – but neither is immune to the drivers that continue to shape the real estate landscape.
For more information about this topic, please get in touch with Ian using his details below.
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Ian Horswell
HEAD OF BUSINESS DEVELOPMENT, FUNDS, EMEA & APAC
