In the case of real estate, an asset whose value is underpinned to such a large extent by locality, it’s not always easy to draw generalised conclusions in global terms. “It’s certainly true that real estate markets differ greatly from one region to another – and even within specific cities or neighbourhoods,” says Markus. “Supply and demand can vary markedly from one economy to the next. You also have to take into account factors such as legal differences, varying tax regulations and foreign investment restrictions.”
Examining the market through an international lens does shed light on certain patterns and correlations, however. Take the current macroeconomic environment: against a backdrop of tightening monetary policy and expanding property yields, the cash flow yield from real estate becomes a relatively larger component of the total return. In such times, real estate investors generally focus on property segments like the residential or logistics market, which offer the potential for rental growth that offsets current inflation.
“Identifying the broader trends requires a combination of macro-level analysis with a deep understanding of local market dynamics,” says Markus. “Clients want to understand how changes in economic indicators at a global level might trickle down to affect the local real estate markets in which they operate.”
Below, Markus shares with us six directions of travel on the real estate market and how international investors might be able to turn them to their advantage.
1. Focus on rental housing
Around the world, populations are facing a housing shortage. Rising construction costs, rapid urbanisation, population growth and scarcity of land – especially in and around cities – have all combined to create a market of short supply and high demand. In an environment with elevated house prices and rising interest rates, many first-time buyers will struggle to get a mortgage. Hence, residential demand is shifting away from owner-occupied housing towards the rental sector.
This makes the rental residential sector an increasingly attractive proposition for investors. Historic property market data shows that residential rental income has the potential to deliver attractive risk-adjusted returns and provides a strong hedge in times of higher inflation. With an annual transaction volume of over USD 200 billion, the US is by far the largest and most liquid rental housing market in the world. In Europe, Germany also offers a very liquid rental housing market, with almost USD 20 billion of annual transaction volume.
2. Go green for long-term yield
Incorporating green building principles into your investment strategy not only demonstrates a commitment to mitigating climate risk but can also bring healthy returns. The arrival of new resource-saving technologies like solar panels, robust insulation, and water-saving devices offer investors potential for long-term savings and increased profitability. They are also increasingly called for to meet the stricter regulations and incentives being implemented by governments to promote sustainable construction and operation of buildings.
Recent years have seen considerable discussion around the existence of a so-called ‘green building premium’, whereby occupiers pay higher rents for green certified commercial property and investors pay more capital to purchase such assets. A study by MSCI, taking in prices paid for offices in London and Paris, shows that a premium has emerged for buildings that have sustainability ratings from building standards authorities versus those that have not yet achieved those standards. In the longer term, the greater risk to a building’s value implied by high emissions will also be accounted for in the valuation process. The market price of such properties will reflect the capital needed to make the climate-related upgrades necessary.
3. Logistics are a moving proposition
The rise of e-commerce has greatly increased the demand for logistics centres and distribution facilities. As more consumers shop online, there is a need for efficient storage, sorting, and transportation of goods. Investing in logistics centres allows investors to tap into this expanding market and benefit from the growth of e-commerce.
This sector has proven to be especially popular with institutional investors, including pension funds, private equity funds, and real estate investment trusts (REITs). Its lure lies, among other things, in the fact that logistics centres offer income stability because they attract long-term leases from reputable tenants, including e-commerce giants. It’s also worth remembering that, due to the need for efficient distribution and supply chain operations, logistics centres are usually found in strategic locations, with proximity to major transportation hubs, motorways, ports and urban centres. In particular, logistics centres for the last mile close to urban centres will become more important in the future.
4. Ride the wave of reshoring
The concept of ‘reshoring’, whereby manufacturing or business operations are relocated back to the home country, has gained increasing momentum in recent years. The Covid pandemic and geopolitical uncertainties highlighted vulnerabilities in global supply chains, leading to disruptions in transportation, logistics, and the availability of essential goods. The trend has also been driven by rising wage costs in traditional offshoring locations and the increasing automation and robotisation of production processes.
In response, many companies have rethought their supply chain strategies to enhance resilience and reduce their reliance on overseas economies. These reshoring efforts require significant capital expenditure and give rise to opportunities for investors. Investing in well-located industrial properties that provide suitable infrastructure and amenities can yield attractive rental income and potential capital appreciation. In some cases, reshoring may involve repurposing or revitalising existing real estate assets, allowing investors to explore opportunities from redeveloping or adapting existing properties into modern industrial spaces.
5. Space as a service
With the possibility to work remotely from anywhere in the world, the traditional office landscape will look different in the future. Global companies might still need headquarters in a central business location for representation and collaboration purposes, but they probably do not need offices in each city or country in the world. With that in mind, flexible office providers can be an attractive alternative for global corporates today. Here, companies can choose from a variety of additional services including IT, cleaning, food and concierge services in addition to the traditional office space.
Similarly, the life science real estate market provides attractive investment options with an increasing demand for fully equipped laboratory spaces. This allows start-up companies to spend their money on research and development rather than devoting capital expenditure to fit out their labs. Compared to traditional offices, lab spaces often prove to be a more defensive investment as researchers in the life science industry will need the facilities of their laboratory and therefore cannot work remotely.
6. Make inroads into infrastructure
When we think of real estate investing, we automatically picture buildings, be they commercial properties like office space or manufacturing facilities, or residential property such as family homes or apartment blocks. But don’t ignore infrastructure, that is, investments involving the purchase, development or operation of physical assets that provide essential services or support economic activity.
Infrastructure investments are particularly attractive to investors during times of economic volatility such as the present because they are non-cyclical. They provide critical services, support societal functioning and (literally) pave the way for economic activity, providing a degree of insulation against economic downturns. These assets often have long lease periods ranging from several years to several decades, and can thus generate stable and predictable cash flows over the long term. For example, airports or toll roads typically generate revenue through user fees or lease payments.
With rising government deficits in many countries and the push for the energy transition, there is growing demand for private capital to bridge the gap between the targeted infrastructure capex and the potential government spending.