The real estate investment market continues to be one of the largest worldwide, worth $24.67 trillion in 2023 and predicted CAGR of 2.7% annually until 2028, but it has not been without its struggles.
As inflation pushed interest rates and debt costs high, 2023 was a somewhat volatile year for real estate investment. Characterised by a withdrawal of debt from the market and a more cautious and slowed approach from investors thanks to valuation uncertainty, last year saw a steep drop in transactions from the previous.
But with inflation rates dropping into 2024, what trends can investors look out for in the coming year? We’ll break some down for you.
One to Watch: Inflation.
The decrease in the inflation rates could see investors release a cautious sigh of relief, as banks will expectedly reduce interest rates. However, the effects of these reductions may not be seen immediately, as the lagging effects of 2023’s monetary policy and increased entry into fixed rate debt agreements could create delay. The introduction of B3E regulations can also see an increased focus on risk and the reduction of leverage in real estate investment in the coming year. The timing of relief from increasing interest rates will be led by central banks’ decision making, with the EU expected to see reductions as early as Q2, followed by the UK and US later in the year.
A Star Player: Residential Real Estate.
Residential real estate saw a more stable year in 2023, which is expected to continue into 2024. The main pressure will be faced in the lack of supply for residential housing, and an ever-increasing growth in demand thanks to student migration and the knock-on effect of rising mortgage rates increasing the average renting period.
This pressure will only open up opportunity for investors, creating attractive investment options in the development of high-quality assets especially with the growing consumer interest in luxury PBSA, co-living and senior living concepts. An expanding rental population and increasing worries about the effects of climate change is creating a change in what residents want to get from their housing – and what they’re willing to pay for it.
One to Action: A Change in Mindset.
So, what does the outlook of a lagging decrease in interest rates mean for investors?
Real estate assets will most likely change their role within the investor’s portfolio, as increasing interest rates continue to affect their usefulness as bond proxies, and they stop providing the same ‘automatic’ capital appreciation as before.
‘The days of ‘lower for longer’ interest rates are firmly behind us. Global property investors can no longer rely on yield compression and cheap debt to drive returns – there needs to be a fundamental shift in mindset.’ (Jose Pellicer, M&G)
But a shift in mindset to what? Instead of looking for growth, there is plenty of opportunity for returns through asset income from investment in high quality and well managed assets. Sustainably built and managed assets will also see better valuation both short and long-term, thanks to increased ESG performance (more on this to come from us in 2024). Choosing progressive developments and improving the quality of existing assets will become increasingly beneficial, as will improving green credentials, and ensuring efficient building management of existing assets. While interest rates may be slowing the pace and activity of real estate investment, there is still revenue opportunity in higher quality and green certified assets that are likely to provide sustained income growth.
Looking Forward.
With these predictions for the Real Estate Investment market outlook for 2024 in mind, what should you focus on in the coming year?
- 1. Strong demand drivers.As increasing interest rates are changing the way in which real assets provide returns for investment portfolios, leaning into sectors with strong demand and high-income potential could be a move the right direction. Assets within the residential sector are in a category of growing demand moving into 2024 and, as consumer desires shift towards both luxurious and sustainable living, offer great opportunity for income growth when combined with effective operational management to keep emissions and costs low.
- 2. Embracing digital advancement.Despite its size, the real estate market has been one of the slowest to keep up with digital advancements. However, with the increasing need for efficient asset management, PropTech should be embraced by those looking to maximise both the income and value potential of real assets. Streamlining operations and cutting costs quickly with the help of PropTech and AI can give the necessary edge to maintain a profitable portfolio; and incorporating such technologies early will gain much greater advantage as markets moves towards technological integration.
- 3. Focus on ESG.As we edge a year closer to NZC 2050, ESG regulations only become more important to take note of, and investment into high quality assets and digital tools shows long-term vision towards the advancement of sustainability regulation. Future proofing assets for adaptability to increasingly stringent green regulation can help provide more long-term stability in asset value, and implementation of green asset management techniques can prevent asset degradation and high running costs. All of which should aid real asset income performance.
As the nature of returns on real assets continues to change, there is an increasing need to embrace newer technologies and systems to improve building efficiencies. AI is pushing the curve in all aspects of real estate investment, from asset comparison to building management. And, despite some potential challenges in the year ahead, staying adaptive and embracing change will surely provide investors with a clear path in 2024.
Get in touch today to find out how Utopi can help Investors in 2024, and how our transformative solutions can add value to your assets.
Author: Jonathan Burridge, CEO and Co-Founder at Utopi.