Today's investment environment is characterised by structurally higher inflation and real estate investment can be a first line of defence in preserving purchasing power. Markus Waeber, Head of Indirect Real Estate Advisory & Intelligence at Julius Baer Wealth Management Group, highlights six global market trends real estate investors need to consider to ride out the current cycle.
Investing in real estate against inflation
In the case of real estate, an asset whose value is hugely location-dependent, it is not always easy to draw generalised conclusions on a global scale since "real estate markets differ considerably from one region to another, and even within the same city or neighbourhood," as Markus Waeber points out. He adds that "supply and demand can vary greatly from one economy to another. Factors such as legal differences, different tax regulations and restrictions on foreign investment must also be considered".
However, examining the market from an international viewpoint sheds light on patterns and correlations. In a context of tight monetary policy and rising real estate yields, real estate cash flow yields become a relatively larger component of total returns. In these times, real estate investors tend to focus on real estate segments such as the residential or logistics market, which offer rental growth potential that offsets current inflation.
"Identifying more general trends requires a combination of macro-level analysis with a deep understanding of local market dynamics," says the expert. So "clients want to understand how changes in global economic indicators might affect the local real estate markets they operate in".
The six real estate investment trends
If you're interested in this type of investment, he outlines six options in the real estate market and how international investors could use them to their advantage.
Focus on rental housing
The world's population has long been facing a housing shortage, influenced by rising construction costs, rapid development, population growth and land scarcity. This is particularly noticeable in and around cities, where factors have combined to create a market characterised by low supply and high demand. In an environment of high property prices and rising interest rates, many first-time buyers will find it harder to obtain a mortgage, which is shifting demand towards the rental sector.
This makes the residential rental sector an increasingly attractive proposition for investors, with historical data showing that residential rental income has the potential to offer attractive risk-adjusted returns and provide a solid hedge in times of higher inflation. With an annual transaction volume of over $200 billion (€189.24 billion), the United States is the world's largest and most liquid rental real estate market. In Europe, Germany also offers a very liquid rental real estate market, with an annual transaction volume of almost $20 billion (€18.92 billion).
Going green for long-term benefits
Incorporating green building principles into one's investment strategy demonstrates a commitment to climate risk mitigation and can bring interesting benefits. The advent of new resource-saving technologies, such as solar panels, resilient insulation and water-saving devices, offers investors the potential for long-term savings and increased profitability. They are also increasingly called upon to comply with stricter regulations and government incentives to promote sustainable building construction and management.
In reecnt years, there has been much debate about the existence of a so-called "green building premium", whereby occupiers pay higher rent for green-certified commercial real estate, and investors pay more capital to acquire such assets. An MSCI study analysing prices paid for office space in London and Paris shows that a premium for buildings with sustainability ratings from the building authorities has appeared over those that have not yet achieved these standards. In the long term, the increased risk to a building's value from high emissions will also be factored into the valuation process, so their market price will reflect the capital required to make climate-related improvements.
Logistics is a proposal in motion
The rise of e-commerce has increased the demand for logistics centres and distribution facilities. As more and more consumers shop online, goods need storing, sorting and being transported efficiently. This means investing in logistics centres allows investors to tap into this growing market and benefit from e-commerce growth.
This sector has proved particularly popular with institutional investors, including pension funds, private equity funds and real estate investment trusts (REITs). They are attractive, partly because the logistics centres offer income stability because they attract long-term leases from reputable tenants, including e-commerce giants. It is worth mentioning that, given the need for efficient distribution and supply chain operations, logistics centres are often located in strategic locations, close to major transport hubs, highways, ports and city centres. In the future, last-mile logistics centres close to urban centres will become more important.
Riding the offshoring wave
In recent years, the concept of "offshoring", which involves relocating production or business activities away from the country of origin, has gained momentum. Pandemic and geopolitical uncertainties have 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.
As a result, many companies have rethought their supply chain strategies to improve resilience and reduce dependence on foreign economies. These offshoring efforts require significant capital expenditure and create opportunities for investors. Investing in well-located industrial properties with adequate infrastructure and services can generate attractive rental income and potential capital appreciation. In some cases, offshoring may involve converting or revitalising existing properties, allowing investors to explore opportunities arising from redeveloping or adapting existing properties into modern industrial spaces.
Space as a service
With the ability to work remotely from anywhere in the world, the traditional office landscape will be different in the future. Global companies may still need headquarters for representation and collaboration purposes, but won't need offices in every city or country. With this in mind, flexible office providers can be an attractive alternative for global companies today, where they can choose from additional services, such as IT, cleaning, catering and concierge, in addition to traditional office space.
Similarly, the life sciences real estate market offers attractive investment options with an increasing demand for fully equipped laboratory space. This allows new companies to devote their money to research and development rather than investing in equipping their laboratories. Compared to traditional office space, lab space is often a safer investment, as researchers need their own lab facilities and cannot work remotely.
Getting into infrastructures
When we think of real estate investments, we automatically think of buildings, be they commercial real estate, such as production offices or residential real estate, such as single-family homes or condominiums. But we should not ignore investments that involve buying, developing or operating physical assets that provide essential services or support economic activity.
Infrastructure investments are particularly attractive to investors in periods of economic volatility because they are non-cyclical. They provide essential services, support the functioning of society and pave the way for economic activity by providing a degree of insulation from economic downturns. These assets often have long lease periods, ranging from several years to several decades so they can generate stable and predictable cash flows over the long term. This is the case with airports or toll roads, which typically generate income through fees or rent.
With rising public deficits in many countries and the drive for energy transition, there is a growing demand for private capital to bridge the gap between planned infrastructure investments and potential public spending.