Outlook 2024: 10 essential questions for real estate investors

Savills Investment Management (Savills IM), the international real estate investment manager, today announces its global outlook for real estate investment markets in 2024, highlighting several key sectors it believes offer rewarding  opportunities for informed investors. The report offers insights on ten questions that Savills IM analysts believe investors should seek to answer before allocating in 2024.

Alex Jeffrey, Chief Executive, Savills Investment Management, Commented:  

“2024 will likely prove to be another challenging year for real estate investors. However, periods of high market stress will present opportunities to those investors with the requisite market knowledge. We see allocators tilting towards Living, Industrial & Logistics, Debt and, in increasingly, Natural Capital orientated strategies,”

Andrew Allen, Global Head of Research, Product Strategy and Development, Savills Investment Management, Commented:  

“Urban industrial & logistics continues to be driven by strong fundamental factors and demand for modern, ESG compliant best-in-class assets create opportunities for investors. Elsewhere in the affordable housing sector, the role of private capital continues to grow in importance as part of the solution in ensuring the continued availability of homes for residents across Europe.”

“Debt markets keep providing attractive risk-adjusted returns with strong downside protection. Against a backdrop of heightened cyclical market uncertainty, the stable income provided by senior real estate lending will remain highly attractive to institutional investors.”

Savills IM’s 2024 sector outlook:

Living

Rent affordability is the issue for residents, policymakers and investors into 2024 and beyond. Demand continues to outstrip supply, and consequently the average household faces a marked deterioration in affordability and with limited alternative housing options.

The answer lies in a major program of development, but the short- term answer is that no quick fix exists, from either the public or private sector. Consequently, the prospect of policy interventions on rents through controls is rising.

Investors should be mindful of the affordability thresholds of their residents and the risks of policy responses as the affordability crisis deepens.

Long term, institutional investors can be part of the delivery of new supply. Short term they should take steps to reduce reliance on extreme, top-line, market rental growth.

Logistics & Industrial

Considering the changed interest rate landscape, the factors driving future industrial and logistics returns are transitioning from cap rate tightening to rent growth; and real rental growth predictions are sound. The excess occupier demand is structural for the core industrial and logistics locations, and rents will continue to rise.

Rental growth will be supported by low vacancy rates, and new supply constrained by high finance and development costs.

Poor quality of existing stock is also a factor, with many buildings being outdated for operational and energy performance requirements.

Proximity to customers and business partners is becoming the key success criterion for efficient and robust value and supply chains, and this is evident globally. Whilst occupiers might seek to pay less to reflect the economic conditions, they will pay more for operationally efficient buildings, taking up less space, but paying higher rents per sq metre. Urban industrial & logistics assets continue to look attractive. Connecting the fundamentals of need for urban facilities and the shortage of available land, suggests the opportunity for more intensive use of suitable sites and these commanding higher rent and capital values.

Debt

Real estate debt markets are experiencing several supportive trends which in our view creates a compelling opportunity today.

Declining availability of debt financing, real estate yield rerating, and rising interest rates have created favourable return conditions.

Lenders should be considering whether their equity cushions need to be checked for potentially unprecedented capital movements. In times of heightened cyclical market uncertainties, senior real estate lending protected by the cushion of high equity represents an appealing investment approach for institutional investors.

Natural Capital

“The economy is a wholly owned subsidiary of the environment, not the reverse”.  The word “capital” reminds us that nature is an asset which has a value that can be enhanced or destroyed. Nature is invaluable given our reliance on it and its life supporting ecosystems.

Approaches to reduce greenhouse gas emissions, sequester carbon dioxide and lock up carbon and in turn, create high integrity carbon units, bundled with multiple co-benefits including biodiversity enhancement produce voluntary verified carbon units that can be used to meet net zero ambitions or sold.

Retail

We see opportunities in the high income return that retail offers, with parts of the market supported by compelling fundamental drivers.  Retail has moved from being one of the lower income sectors to the highest.

Although structural and cyclical issues have proved challenging over recent years, we believe that the structural challenges (sales diversion) are clear and that the cyclical challenges (cost of living) will repair over 2024 and beyond. This has different implications for the various parts of the retail sector and investors should recognise the breadth of risk and opportunity.

Ecommerce continues to dilute spending through physical shops, but we sense footfall in Europe’s main retail destinations has returned strongly, consumers enjoying the therapy of physically shopping in compelling, diverse, and entertaining retail environments.

However, the target investment markets are much reduced, and investors need to be more forensic than ever around specific locations.

Offices

The nature of occupational demand diverges considerably across Asia Pacific, Europe and North America with the former witnessing largely robust demand and confidence and the latter struggling under a hybrid working and supply burden.

Across Europe, three key factors are altering the nature of tenant demand and ultimately investor returns, namely: structurally weaker occupier demand; increasing lease flexibility; and energy efficiency and sustainability demands.

As occupiers demand coalesces around higher quality, well-located, sustainable buildings, investors options are to acquire or create the best assets in the best locations. A near-term supply squeeze on grade-A stock is expected to drive rental growth for better quality stock.