Real Estate: Traditional Foundations, Emerging Opportunities

What Are Real Estate Assets?
The global investable real estate market is worth $19.5 trillion, with $13.3 trillion professionally owned and managed (source MSCI Real Estate Market Size Report, July 2023). Historically, institutional investors focused on four traditional property types—apartments, industrial, office, and retail—which offer limited diversification and closely follow economic cycles. However, post-COVID-19, changes such as remote work reducing office demand, have turned attention toward alternative sectors such as single-family rentals, student housing, senior living, medical offices, self-storage, and data centres. These sectors provide better diversification, align with trends like aging populations and technological advancements, and are less tied to the business cycle. While the U.S. leads in alternative real estate, interest is growing in Europe, Canada, and Australia.
 
Real estate offers income through rent and potential capital value growth. Investors can access it directly by purchasing property or indirectly through property companies or Real Estate Investment Trusts (REITs). REITs are traded on stock exchanges and provide easy access to global real estate without requiring large capital commitments. They offer liquidity, daily valuations, and stable income with attractive dividends compared to stocks. REITs also provide some inflation protection as leases on properties are often linked to inflation. However, they are sensitive to interest rate changes, can be volatile, and have tax considerations. Management fees and lack of control over properties may also impact returns negatively.

Recent Performance
REITs have performed well over the past year, with many gaining in Q3 2024 amid expectations of interest rate cuts. Sectors like healthcare, self-storage, and retail REITs have done better than others, with healthcare REITs benefiting from strong demand for senior housing. Office REITs, heavily impacted by high interest rates and the shift to flexible work, have recovered from mid-2023 lows. Over the short term, REITs correlate closely with equities, but over time, their performance aligns more with direct real estate investments.
 
Market Variations and Outlook
Real estate markets vary globally. In Europe and the UK, longer leases (around 10 years) emphasise stable cash flow, while shorter leases in Asia (about three years) tie performance more closely to economic cycles and development-driven growth. Property types also perform differently. Hotels, with short leases (e.g. nightly stays), are highly cyclical and respond quickly to demand shifts, while offices and healthcare properties with longer leases (8-10years), are more stable.
 
Looking ahead, alternative sectors will likely benefit from demographic and technological trends, such as aging populations increasing healthcare demand and rising data needs driven by AI (artificial intelligence) and cloud computing. Property valuations are close to fully adjusting to higher interest rates, which may present an attractive entry point if economic and interest rate conditions stabilise. Real estate remains a valuable component of a well-balanced and diversified portfolio, helping to balance risk and achieve long-term financial goals.
 

The Noise

• The U.S. economy grew at a steady annualised rate of 2.8% in Q3 2024, in line with expectations but slightly slower than the 2.9% growth recorded in Q2. Consumer spending was a major contributor to growth, showing its strongest increase since early 2023, driven by strong demand for goods and consistent spending on services. Government spending also provided support. Trade had a modestly smaller impact on growth as both exports and imports were revised lower, with significant gains in equipment investment partially offsetting ongoing weakness in structures and residential investment. The GDP data showcases the durability of a US economy that’s been tested by lingering pricing pressure, high borrowing costs and political uncertainty. With Donald Trump set to return to the White House in January, American businesses and consumers are now looking ahead to the roll-out of his economic agenda

• Eurozone inflation rose to 2.3% in November, marking the second consecutive monthly acceleration. This figure is in line with market expectations and came in above the ECB’s inflation target. This conforms to the bumpy path ahead which officials have anticipated. Services was the primary component behind the annual gain in consumer prices, with the uptick largely expected due to base effects. Conversely, inflation in services and food categories eased slightly, and core inflation—excluding volatile components—held steady at 2.7%, contrary to predictions of a slight uptick. This figure is critical as it’s the last big data point informing policymakers before their final interest rate decision of the year in December. Analysts widely expect the European Central Bank to proceed with a 25-basis-point rate cut to 3% at its December 12th meeting, marking the fourth reduction this year, as they try to tackle inflation in the eurozone

• The French markets experienced volatility this week due to political instability. Mounting fears of a government collapse emerged as Prime Minister Michel Barnier struggles to pass a contentious budget with €60bn in spending cuts and tax increases without a parliamentary majority. The budget impasse has heightened the likelihood of a no-confidence vote that could bring down the Barnier government, further intensifying market concerns. This uncertainty triggered a sell-off in markets driven by fears of a potential governmental collapse. As a result, the French benchmark Cac 40 stock index fell 1.5% this week through to Thursday’s close, making it the worst performer among major European markets. Specific French banks and insurers were hit the hardest by this uncertainty, with AXA down 4.3% and Societe Generale down by 3.5%. Additionally, the standoff has driven French 10-year bond yields above 3%, underscoring growing investor concerns about the sustainability of France's debt load

The Numbers

The Nuance

The dust has now settled after the UN’s latest climate conference, COP29, held in Baku, Azerbaijan. The summit primarily focused on international negotiations around hundreds of billions of dollars in new climate funding but was also marked by political jabs and the usual party politics. It highlighted the increasing difficulty of balancing immediate economic concerns, like inflation, with the long-term need for climate action.

The lingering political uncertainty around climate change was evident at COP29, particularly due to the legacy of the Trump administration's threat to pull the U.S. out of the Paris Agreement. This spectre continued to affect negotiations, with political disagreements complicating efforts to achieve consensus on critical issues.

One key outcome of the summit was a breakthrough on carbon markets, an agreement years in the making. The finalization of rules under Article 6 of the Paris Agreement enables countries to trade carbon credits with each other and with companies, aiming to reduce global emissions. While this could potentially unlock investment in emissions-reducing projects, there are concerns about the environmental integrity of these credits. Critics argue that the rules are too lenient, allowing credits with questionable environmental value to flood the market, which could undermine the credibility and effectiveness of the mechanism.

The geopolitical dynamics at COP29 also highlighted the difficulty of achieving global consensus. Saudi Arabia, a major oil exporter, and China, the world’s largest emitter of greenhouse gases, both resisted calls for stronger action on fossil fuels. This resistance underscored the challenge of reconciling national interests with global climate goals. The final agreement’s failure to clearly mandate fossil fuel transitions reflects the ongoing tension between fossil-fuel-dependent economies and the urgent need for climate action.

However, despite fractious and at times openly hostile negotiations, a climate finance deal was reached at the close of the two-week summit. Some richer countries have pledged to provide at least $300 billion in climate finance annually by 2035, $50 billion more than previously agreed upon. While this commitment represents progress, many still see the agreement as imperfect. It is, however, a significant first step in the right direction.

Looking ahead, there is still much work to be done, as many agree that the agreement is far from perfect. Yet, this deal marks a positive starting point, despite the fractured nature of the negotiations and the complex challenges ahead.