In recent years, investments in the real estate sector have seen a decline due to falling property values and a shift towards expanding equity portfolios. However, according to Donald Hall, Global Head of Real Estate Research at Nuveen, investors are now looking to refocus on the private real estate market as a strategic way to diversify their portfolios. Private real estate continues to prove itself as an asset class that is less correlated with other investment types, offering a strong source of returns and protection against inflation. This presents excellent opportunities for those who take a long-term approach to investing.
Real Estate Returns in 2024
Signs of Recovery in Valuations and Total Returns
The global real estate market is finally showing signs of recovery after two consecutive years of cumulative losses. During the second quarter of 2024, global real estate returns recorded a positive turnaround, suggesting the start of a rebound for this asset class. During the period of ultra-low interest rates, property values had significantly increased, with global quarterly returns reaching 5.0% in Q4 2021 and an impressive annual rate of 17.8% in the subsequent quarter, far exceeding long-term averages. However, a tightening cycle has brought global property values back to 2018 levels.
Today, the real estate market appears to be stabilizing, attracting investor interest. This sector is renowned for generating stable income and plays a strategic role in portfolio diversification. Historically, real estate has been able to deliver substantial returns during economic recoveries. For example, following the recession of the early 1990s, the cumulative five-year return was 76%. After the tech bubble burst, it soared to 98%, and post the global financial crisis, it was recorded at 86%.
Reduction in Value Losses and Positive Total Returns
During the second quarter of 2024, losses in property values have decreased to just 0.74%, marking the lowest quarterly correction in two years. These losses were offset by income, which stood at 1.07%, resulting in a positive overall return of 0.33%—the first positive result since the second quarter of 2022. Additionally, among the 15 markets tracked by the MSCI Global Property Index, a slight majority experienced increases in property values compared to the previous quarter. Notable gains were observed in Japan, South Korea, Singapore, Southern Europe, and the United Kingdom. Even in areas where losses persisted, the corrections were smaller than in previous quarters, ranging from 0.3% to 1.5%.
Stable income is a fundamental component of real estate returns, often cited by investors as a key reason to include this asset class in their portfolios. In Q2 2024, total returns—comprising both capital appreciation and income—were positive in twelve of the fifteen major markets, indicating a potential strengthening trend.
Global Recovery in Transaction Prices
Analyzing data from the MSCI Commercial Property Price Index reveals that, among 11 countries with available data, six reported increases in transaction prices during Q2. These countries include Japan, South Korea, Canada, the United States, France, and the United Kingdom, with the U.S. showing the highest increase. However, the differences between property types and specific markets open up opportunities for higher returns during this price discovery phase.
A Return to Real Estate
The stabilization of property values and transaction prices suggests that the market may have reached its lowest point. However, more signals are necessary to establish a clear entry opportunity. A decrease in interest rates by major central banks could positively influence financing rates and capital values in the real estate sector. Furthermore, the slowdown in global construction activity contributes to strengthening the market’s fundamentals in the medium term.
While these dynamics may pose challenges for builders, they present a favorable scenario for investors and landlords. In markets where demand is increasing—such as those driven by e-commerce or demographic expansion—property occupancy is set to rise, positively impacting occupancy rates and rental income.
In conclusion, as the real estate market shows signs of recovery, now may be an opportune time for investors to consider re-entering this asset class. With strategic planning and a focus on long-term benefits, investing in real estate could yield significant rewards.
This article is originally published on idealista.it
