New real estate value cycle 'close at hand': Invesco

With interest rates on the precipice of a new declination cycle following steam being letting out of the global inflation bag, experts are tipping a new era in real estate to wash over the global market in early 2025.

In a recent whitepaper, Global commercial real estate update: State of play heading into Q4 2024, Invesco managing director of real estate and global investment strategist Mike Bessell explained a quiet Q4 should lead into a re-emergence of accelerated transaction activity across all levels of global property investment in the new year.

“With slowing inflation, and the initial easing of interest rates in some European markets expected to be followed elsewhere, we believe we are at the start of a new real estate cycle,” Bessell (pictured) said.

Interest rates will fall, that much is clear about the broader economic cycle. Importantly, however, they won’t fall to the degree they have over the past decade. For the near future at least, the economic swings should be milder; this recovery will be won on the margins, he explained, with property income and local knowledge set to emerge as key arrows in the quiver for investors.

“Looking ahead for the next couple of years, the macro environment will likely be one of ongoing short-term volatility in interest rates,” Bessell said. “We expect interest rates to fall from current levels but settle/normalise at higher levels than seen over the prior decade. Global gross domestic product is likely to be lower than the previous decade and we also expect greater divergence between markets.”

Three themes will pervade the global property recovery, he explained, and emerge as the most important areas for investors to home in on. The first will be the focus on income growth, especially in the commercial real estate sector.

“Over the last couple of decades, declining interest rates have led to declining commercial real estate (CRE) cap rates [the ratio between the annual rental income produced by a real estate asset to its current market value] and helped drive value growth,” he said. “Going forward, we expect declining interest rates to exert less influence on CRE cap rates.”

The limited ability of cap rates to assist in swelling income returns leads to the second thematic, which is that market-level real estate returns will be muted without the use of other non-cyclical drivers such as “shifting demographics and advancing technologies, or from active management of individual properties”.

The third theme to watch will be wide variations in the pricing of the different real estate sectors, “both globally and within individual markets”, driven by income outlook changes for each sector.

The overriding message from Invesco, however, is that income growth will face challenges as economic growth slows. In the new real estate value cycle, secular drivers will be key differentiators. If investors have access to these drivers, the near-term could be a worthwhile entry-point.