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:
1 Source: Oxford Economics as of September 2018