The world ahead
Liam Bailey explores the five big themes shaping real estate investing this year
5 minutes to read
1. Global growth will slow, but geopolitics will support critical sectors
The global economy has defied recession fears with robust growth over the past 12 months, most notably in the US. Despite apparent stability in developed economies, growth will slow over the coming year. Global GDP will likely expand by around 2.9% in 2024, down from 3.1% a year earlier. The American economy’s unexpected resilience is partly down to increased consumer spending, fuelled by savings accumulated during the Covid-19 pandemic. Once these savings diminish, higher interest rates will constrain spending, dragging on growth. The world’s economic stability is also underpinned by substantial but unsustainable government spending, resulting in historically high levels of government debt. Higher debt costs mean a reckoning is coming for governments this year.
Relations between the US and China showed some signs of thawing following a November meeting between presidents Joe Biden and Xi Jinping, but their economic rivalry will continue to escalate, adding to a fractious outlook for geopolitics. The fragmentation in relations initiated during the Trump administration, and expanded under Biden’s leadership, will likely lead to increased investment in strategic sectors such as technology, energy and defence.
2. Rates will fall, just not as much as investors hope
While the inflation surge is subsiding, the extent and pace of rate cuts remains uncertain. Investors are convinced that we’ll see a sustained fall in rates over the course of the year, but how low they will go remains subject to conflicting long-term trends.
Some factors will weigh on debt costs, notably the world’s ageing population. This demographic shift towards higher savings will lead banks to cut lending rates as they aim to align higher deposits with increased borrowing. That will be counterbalanced by the greening of the global economy and the ongoing decoupling of the West from China’s supply chains. Both transformations require huge public and private investment. In the long run, the global economy will acquire additional energy sources and increased productive capacity, but achieving these goals will exert significant upward pressure on the prices of raw materials, infrastructure and labour.
3. Liquidity will improve in 2024
Global property markets suffered value corrections in 2023. While most residential markets got off lightly, commercial markets felt the brunt of the downturn. New lending will be issued below the cost of debt that prevailed in late 2023, but still above the levels at which existing deals were struck. Even as central banks cut rates this year, it will still feel for many as though monetary policy is tightening.
This process, while painful for some, is the key to a real estate market recovery in 2024. Lower values, lower interest rates and some forced selling will allow for a much anticipated improvement in investment volumes. With more than US$2 trillion in loans set to mature through to 2027 in the US alone according to MSCI, opportunities for well-capitalised investors will appear with increasing regularity as the year progresses.
Real estate is hitting a perfect storm of disruption. Hybrid working, the green agenda, the retail reinvention and a critical under-supply of housing are big themes with a long way to run. Despite the repricing of property, the volume of apparently stranded assets will rise as use requirements shift, environmental policy requirements bite and refurbishment costs rise. But with record funds totalling more than US$483 billion (Preqin) waiting to be invested, 2024 will mark the turning point for investment volumes.
4. AI investment will drive real estate requirements
By 2025, approximately 40% of corporate IT expenditure is anticipated to be directed towards AI-related projects, with IDC projecting an astonishing annual investment of US$500 billion in AI products by 2027. This substantial investment will be
felt acutely in the real estate sector, driving a surge in demand for specific property categories.
There will be a sizeable increase in demand for data centres, especially as proximity to cost-effective energy sources becomes increasingly critical. Expect a heightened need for specialised office spaces tailored to accommodate collaborative research and laboratory requirements. The rising demand for research facilities, pivotal to the development of AI-related hardware and software, will likely favour industrial real estate located near universities or established technology hubs.
Moreover, the integration of AI-driven building management systems will elevate service standards in energy efficiency, climate control and security. This enhancement will further distinguish top-tier office buildings from others in the market, enhancing their appeal to tenants and investors.
5. Climate change will impact property values, but also presents new prospects
There is a 27% chance that 2024 will see the average rise in global temperatures surpass 1.5°C compared with the pre-industrial era, according to the UK’s Met Office. The direct repercussions of this warming trend are already evident, influencing various aspects of the property market. The effects include altered crop yields in agricultural regions, shifts in tourism patterns, physical harm to buildings in vulnerable zones and disruptions in infrastructure.
In the short term, more properties are expected to face indirect consequences, such as rising insurance premiums and the possibility of expanding uninsurable areas. Data from MSCI in the US reveals a significant increase in insurance costs as a percentage of income receivable, more than doubling from 1.0% to 2.3% over five years to September 2023. Coupled with regulatory alterations, this signifies a notable rise in risks for investors who opt to disregard environmental factors in their investments this year.
Conversely, new opportunities are emerging. Demand is rising from both tenants and investors for properties situated in low-risk areas, as well as for energy-efficient buildings. As the toll of climate-related damage increases, there will be heightened demand for technology that assists property owners in preparing for, adapting to and recovering from climate-related hazards and subsequent damage.
Download the full report here