Martin Towns explores the impact of recent macro upheaval on global real estate markets
The global real estate sector – along with the wider economy – has weathered a barrage of shocks over the past 20 years. From the Great Financial Crisis to Brexit, the pandemic and now a second Trump presidency, each has presented a fresh challenge for investors, stress-testing their approach to market volatility and their strategies to mitigate disruption.
Sophisticated investors and managers have evolved, adjusting their strategies not just to weather the storm, but to take advantage of emerging opportunities. The portfolios of real estate investors look quite different today, anchored to enduring structural trends and focused on delivering the commercial spaces and homes needed by today’s society.
Macro differentiators
Concerns about President Trump’s global tariff programme and a wider economic hangover have dampened the confidence of real asset investors in recent months. However, several structural signals indicate that this nascent cycle should prevail over shorter term uncertainty and noise.
The European outlook in particular is characterised by a number of supportive trends which could enable investors targeting Europe to emerge from this era of real estate investing in a comparatively strong position.
Firstly, the ECB has been cutting interest rates ahead of the Federal Reserve, which should provide a boost to consumption and business investment, all else being equal. European consumers remain cautious and are known for their tendency to save. However, with falling interest rates – potentially accelerated by the impact of US tariffs – saving is becoming less attractive and, given real wages are growing, this may result in more spending, stimulating European economies.
Additionally, President Trump’s ‘America First’ policies could boost European cohesion and prompt a reorientation of supply chains akin to the post-pandemic reshoring and nearshoring trends, boosting the European industrial and logistics markets. Added to this is the recent uptick in defence spending across the continent, which has already filtered through into heightened advanced manufacturing activity in Europe’s established industrial heartlands.
Linked to this, Trump’s isolationist stance is prompting certain businesses and talent to reappraise their relationships with the US. There are already early signs of an uptick in student visa applications into Europe from international students who may have otherwise considered higher education at American institutions, as well as a potential drift towards Europe among leading American academics seeking to find a more favourable research funding environment overseas. Each of these factors should contribute to an upswing in the relative appeal of Europe as a destination for the brightest talent, delivering long-term benefits for European innovation and growth.
Investor strategies
It isn’t only the macro picture which sets this cycle apart from previous periods of uncertainty; investors’ approach to market opportunity has also fundamentally shifted since the GFC, providing more protection against downside risk and better alignment of investment strategies with supportive long-term trends which should sustain through-the-cycle returns.
Historically, real estate investors typically divided their allocations between the traditional industrial, office and retail sectors, with a bias towards the latter two. The specification of assets within each of these buckets remained relatively consistent, an approach which worked well in a market characterised by consistent structural drivers. Retail provided income growth and industrial provided higher income; offices were a sure bet. Broad geographic diversification was prized.
Technological change and the pandemic fundamentally disrupted this approach. In some countries, ecommerce and remote working presented existential risks to the future of office and retail property.
The extent and pace of this change has prompted real estate investors to consider the underlying structural drivers of long-term performance – including societal preferences for how we choose to live and work. It ushered in an era of exploration for real estate investors, seeking new avenues through which to tap into shifting demand patterns. The greatest beneficiary has so far been the residential sector, where institutional investors have funded the construction of thousands of new, high-quality homes to rent.
We also saw a new – and enduring – focus on the environmental performance of buildings and the wellbeing of their occupiers. The real estate industry is stepping up to play its part in this necessary change. In part, this has created a new opportunity – to repurpose, upgrade and enhance existing buildings, especially in urban centres; with a laser focus on the needs of today’s society and the skills to reimagine older buildings. Value-add investors are positioned to generate attractive returns.
Contemporary real asset investors are much more agile, with the fundamental skills in-house to adjust their approach as long-term thematics evolve. With greater flexibility than ever before, sophisticated investors are now better positioned to navigate macroeconomic uncertainty and capitalise on trends that might once have threatened their return prospects.
This fresh approach helps to ensure that real estate continues to offer enduring appeal to institutional capital, with the alignment to long-term fundamentals and a keen eye on the evolving needs of society helping to dampen any short-term shocks.
