The global real estate market saw a positive turnaround in the second quarter of 2024, ending two years of consecutive losses and indicating a possible recovery. Low interest rates had led to a surge in real estate values, with global total returns reaching 5.0% in the fourth quarter of 2021 and 17.8% year-on-year in the first quarter of 2022 – well above long-term averages.
However, the subsequent tightening cycle resulted in a decline in values, bringing them back to 2018 levels globally. Now, we believe that the correction in the real estate market is almost complete, making it an opportune time for investors to consider this asset class. Historically, real estate has provided steady income returns and has been a source of portfolio diversification over the long term. It has also shown strong returns during periods of recovery. For example, after the recession in the early 1990s, investors saw a cumulative return of 76% over the next five years.
In the following years, after the tech bubble and the global financial crisis, the five-year cumulative total returns were 98% and 86%, respectively. This evidence suggests that the real estate market is now showing signs of a turnaround in valuations.
In the second quarter of 2024, global real estate saw a moderation in value losses to 0.74%, the lowest quarterly adjustment in the past two years. With offsetting income returns of 1.07%, global real estate achieved a positive return of 0.33%, the first positive quarter since the second quarter of 2022. Out of the 15 global markets in the MSCI Global Property Index, eight markets saw increases in real estate values for the first time since the second quarter of 2022. Meanwhile, six markets saw value losses between 0.3% and 1.5%, all of which were lower than the previous quarter’s losses. Only Australia recorded a larger write-down in the second quarter compared to the first, with a 4.2% correction bringing valuations more in line with other markets.
However, changes in capital values are just one component of real estate returns. Historically, the larger component of total returns has been income. This trend highlights the importance of considering both capital and income when evaluating real estate investments.
In the second quarter of 2024, total returns, which combine capital and income returns, were positive in 12 out of 15 countries in the MSCI Global Property Index. The US saw flat returns (-0.09%), Ireland saw slightly negative returns (-0.22%), and Australia saw significantly negative returns (-3.07%). However, preliminary data from the NCREIF ODCE index (a capitalization-weighted, gross-of-fee, time-weighted return index) showed US total returns turning positive (0.25%). With values starting to rebound, we expect the positive trend in total returns to continue.
Investing in a condo in Singapore is an increasingly attractive choice for both locals and foreigners, thanks to the country’s thriving economy, stable political climate, and exceptional quality of living. With numerous opportunities in the real estate market, condos stand out as a top investment option, given their convenience, amenities, and potential for lucrative returns. This article will delve into the advantages, factors to consider, and essential steps to take when purchasing a condo in Singapore, with a focus on Singapore Projects.
Looking at fundraising for real estate investments, there are signs of a potential rebound globally after two slow years. However, China and Japan may face challenges. In the third quarter of 2024, China and Japan accounted for 27% and 15% of the US$7.5 billion ($10.04 billion) in cross-border inflows in Asia Pacific. While over half of Japan’s inflows were from global sources, most of China’s came from within Asia Pacific, specifically from Hong Kong and Singapore. Both countries are currently facing high debt costs and other hindrances to a strong rebound in real estate capital inflows.
In China, Western interest in real estate has significantly decreased over the past few years due to geopolitical and economic concerns. Despite Beijing’s recent major stimulus package, it is unlikely to return soon. The property market in China has been stagnant due to price dislocation, geopolitical risk, and lack of liquidity. In addition, China has been facing a property crisis since 2021, worsened by the collapse of Evergrande. Due to these risks, many European investors are avoiding China and Hong Kong, regardless of potential returns. Furthermore, China’s domestic property crisis persists, with high office vacancies and low rental yields, ongoing issues with failing developers, and government interventions.
In Japan, the broader property sector is losing appeal due to interest rate policies and limited cap rate compression. In July, the Bank of Japan raised borrowing rates for the first time since 2007 to control inflation, reducing market attractiveness. This hike has prevented cap rate compression, meaning property prices haven’t risen, forcing real estate holders to rely on historically low-income yields. However, senior housing remains an attractive niche due to Japan’s aging population, with 29% of the population aged 65 or over. These assets are small and require an amalgamation play by investors.
In Australia, the purpose-built student accommodation (PBSA) market has huge potential due to a significant housing shortage. Currently, only 20% of students in Melbourne and Sydney can be accommodated by universities, forcing the rest to seek private rentals. Additionally, real estate debt in Australia offers appealing risk-adjusted returns. There are funding gaps in construction, with many developers unable to secure bank financing. We are looking at sectors like logistics or PBSA, where we see long-term growth opportunities.
Overall, the real estate market is likely near its bottom, as indicated by stabilizing valuations and transaction market pricing. However, these signals alone do not indicate an attractive entry point. For market pricing and valuations to increase, we would ideally see declining interest rates and strengthening property fundamentals. Most developed central banks are beginning to taper interest rates, which should put downward pressure on financing rates, discount rates, and property capitalization rates, thereby boosting the value of real estate assets. Additionally, a pullback in construction activity across sectors bodes well for property fundamentals in the medium term. With supply headwinds waning, markets with positive demand due to population growth or structural changes, such as e-commerce, are set to see increased occupancies in the medium term. Historically, occupancies and rent growth are well correlated, providing investors with opportunities to gain from increased occupancies, rents, and the associated rise in property values.
In an uncertain economic and geopolitical environment, additional risks are inevitable, but this applies to all asset classes. Over the past two years, the weight of real estate in investors’ portfolios has significantly decreased due to resetting real estate values and a record stock market. Today, investors might consider fresh allocations to the private real estate market to achieve a strategic weighting. Over the long term, private real estate offers low correlations to other asset classes, strong income returns, and a degree of inflation-hedging. While there may be bumps in the road, we believe the market is beginning to look up, presenting excellent investment opportunities for savvy investors.