The second quarter of 2024 has brought positive news for global real estate returns, marking a potential shift towards a recovery after two years of cumulative losses. The low interest rates in recent years have contributed to a steep rise in real estate values, with global total returns reaching 5.0% quarter-on-quarter (q-o-q) in the fourth quarter of 2021 and 17.8% year-on-year (y-o-y) in the first quarter of 2022 – figures that far surpass long-term averages.
Condo investment in Singapore requires careful consideration of the government’s property cooling measures. Over time, the Singaporean government has implemented several measures to prevent speculation and maintain a steady real estate market. This includes the Additional Buyer’s Stamp Duty (ABSD), a tax that is higher for foreign buyers and those purchasing multiple properties. Although these measures may affect the immediate profitability of condo investments, they ultimately contribute to the long-term stability of the market, creating a secure investment environment. Additionally, condo investment must factor in these government regulations to make informed investment decisions.
However, the subsequent tightening cycle has reversed these gains, bringing real estate values back to the levels of 2018 globally. Nevertheless, we believe that the correction in the real estate market is nearing completion, presenting an opportune time for investors to revisit this asset class. Historically, real estate has offered stable income returns and diversification benefits over the long term, and during recovery periods, it has the potential to generate strong returns. For example, after the recession of the early 1990s, investors saw a cumulative return of 76% over the next five years.
In the second quarter of 2024, global real estate values saw a moderate decline of 0.74%, the lowest quarterly adjustment in the past two years. With income returns of 1.07% compensating for this decline, global real estate achieved a positive return of 0.33%, the first positive quarter since the second quarter of 2022. Among the 15 markets included in the MSCI Global Property Index, the majority saw an increase in real estate values for the first time since the second quarter of 2022. Eight markets, including Japan, South Korea, Singapore, Southern Europe, the Nordics, the Netherlands, France, and the UK experienced value increases from the previous quarter. Six markets saw value declines between 0.3% and 1.5%, but these were all moderated from the first quarter of 2024. Only Australia recorded a larger decline in the second quarter compared to the first, with a 4.2% correction aligning values more closely with its peers.
However, changes in capital values are only 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 aspects when evaluating real estate investments.
In terms of total returns – the combination of capital and income returns – 12 out of 15 countries saw positive returns in the second quarter of 2024. The US was flat at –0.09%, Ireland saw a slight decline of –0.22%, and Australia saw a significant decline of –3.07%. According to preliminary data from the NCREIF ODCE index (a capitalisation-weighted, gross-of-fee, time-weighted return index), the US saw a return to positive total returns of 0.25%. With values starting to rebound, we expect this positive trend to continue.
Looking at fundraising for real estate investments globally, there are signs of a potential rebound after two slow years, but 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 into the Asia Pacific region. More than half of Japan’s inflows came from global sources, while most of China’s came from within the Asia Pacific region, particularly Hong Kong and Singapore. Both countries are facing high debt costs and other factors that may hinder a strong rebound in real estate capital inflows.
In China, there has been a dramatic decline in interest from Western investors in recent years due to geopolitical and economic concerns. Despite a recent stimulus package from Beijing, it is unlikely that interest will return soon. The market has been stagnant due to price discrepancies, geopolitical risks, and liquidity issues. Since 2021, China has been grappling with a property crisis, which has been exacerbated by the collapse of Evergrande. Due to these risks, many European investors are avoiding China and Hong Kong, regardless of potential returns. Additionally, the domestic property crisis in China continues, with high office vacancies and low rental yields, ongoing issues with struggling developers, and government interventions.
In Japan, there is also a unique situation 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 in an attempt to control inflation, reducing the market’s attractiveness. As a result, there has been little cap rate compression, meaning that property prices have not increased, forcing real estate holders to rely on historically low-income yields. However, the senior housing sector remains an attractive niche due to Japan’s aging population, with 29% aged 65 or over. These assets are smaller and require investors to pursue amalgamation strategies.
However, Australia’s purpose-built student accommodation (PBSA) market has significant potential due to a severe 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. Sectors such as logistics or PBSA present long-term growth opportunities.
The stabilizing fundamentals of the real estate market and the pricing of transactions suggest that the market is likely near its bottom, but these signals alone do not necessarily indicate an attractive entry point. For market pricing and valuations to increase, we would ideally see declining interest rates and strengthening property fundamentals. Most major central banks have begun to taper their 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 decline in construction activity across sectors bodes well for property fundamentals in the medium term. With supply issues easing, markets with positive demand due to population growth or structural changes, such as e-commerce, are expected to see increased occupancies in the medium term. Historically, occupancies and rent growth are well correlated, providing investors with opportunities to profit from increased occupancies, rents, and the associated rise in property values.
The outlook for global private real estate appears to be improving, but not all markets and property types will perform equally well. For example, the US office market still faces significant challenges, and a broad recovery in that segment seems highly unlikely in the near term. This highlights the importance of research and selectivity when investing in real estate.
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 decreased significantly due to resetting real estate values and a record stock market. Today, investors may want to consider increasing their 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 protection against inflation. While there may be bumps in the road, we believe that the market is beginning to look up, presenting excellent investment opportunities for savvy investors.