2019 Outlook: Real Estate

The outlook for real estate fundamentals is positive, but risks remain

Dec 18, 2018 | Tim Bellman and Joe Rodriguez

Strong growth in developed economies should continue to support favorable real estate fundamentals in the near term. The baseline scenario remains very positive, and global real estate securities earnings yields are providing a positive spread over local government bonds, a sign that real estate is still fairly priced. Yet macro risks to the outlook are perhaps now greater today than in prior years; many are increasingly global in nature. They include rising populism, an escalation of the US-China trade war, a monetary policy normalization misstep, a disorderly Brexit or a China debt crisis. Should any one of them materialize, it would have the potential to derail the global growth outlook to a measurable degree.

 

Global opportunities
Investor surveys in recent months reflect an increasing appetite for real estate, with allocations to the sector expanding to more than 10% of institutional portfolios. ¹ While greater in the US and Asia Pacific than in
Europe, many investors are seeking to leverage value-add platforms to enhance returns, likely in response to expectations of limited future cap rate compression. In Europe, there is a greater appetite for core strategies, given real estate’s attractive pricing relative to long-term government bonds. We envisage the next few years will be marked by the emergence of new regionally focused offerings that can cater to these changing investor preferences.

 

Regional investment themes
Differences in the regional total return outlook are driven in large part by our expectations of growth, with various local and regional nuances:

  • Asia Pacific - Over the last few years, Asia Pacific returns have surprised to the upside. There have been strong market-level returns, and the region has been the strongest component of the MSCI IPD Global Property Fund Index. Going forward, our total return forecasts for the region are projected to maintain a stable growth profile, driven in part by greater net operating income potential. We favor market-sector combinations benefitting from either cyclical upswings, such as Singapore offices, or long-term secular trends (aging, e-commerce, and technology).
  • Europe - Prime rental growth is becoming increasingly broad-based amidst ongoing economic growth in Continental Europe. Despite Brexit uncertainty, UK real estate fundamentals and capital markets have thus far remained resilient, but peak uncertainty is likely still to come. Limited development pipelines and structural demand growth make logistics and hotels of particular interest. A nascent institutional-grade multi-family housing market presents additional opportunities to participate via forward-funded developments.

1 Source: Oxford Economics as of September 2018

Click Download PDF to read the full outlook