Investment houses are consulting their crystal balls and sharing the key themes that they expect to affect real estate in 2025.
While opinions differ on the geopolitical outlook, coalescing views on macroeconomic markers are leading to something of a consensus that real estate should perform well in 2025.
Political risks
Johanna Kyrklund, Schroders Group chief investment officer, says: ‘Leaving aside political risks, the economic backdrop remains benign. Inflation has moved in the right direction and interest rates are falling in the US and Europe. We expect a soft landing, and our expectation is that growth will reaccelerate as we move through 2025.’
She adds: ‘Trump’s second term will represent an intensification of trends that were already in place: loose fiscal policy and an ongoing reaction against globalisation in the form of higher tariffs.’
Economic forecaster Oxford Economics predicts a ‘brighter outlook for the year ahead’ following a year of transition for commercial real estate. Key themes for the research house include moderate economic growth for the global economy, a tentative revival in CRE capital value growth – driven by rents – and greater transaction activity as a ‘window of opportunity’ opens up.
The forecaster suggests that investors will increasingly allocate to alternative sectors, driven by megatrends such as aging populations and AI, while also exploring emerging opportunities in more niche property types.
Optimistic view
Marc Nachmann, global head of asset & wealth management at Goldman Sachs, echoes the positive tone of his peers. ‘We expect rate cuts to progress in 2025 across most developed and emerging markets with divergence in their pace and timing.
‘We remain optimistic that major economies can achieve sustained economic growth as interest rates ease, although the range of potential macroeconomic outcomes has widened following the US elections,’ he notes.
Like Oxford Economics, Goldman sees huge potential for investors taking the alternative route. An increasing volume of transactions in real estate markets also sets the stage for greater dealmaking, he explains.
‘A rebound in transactions can help to quantify where fair value is. In our view, the discounts to net asset value at which REITs are currently trading are an indication of where investors anticipate fair value may ultimately land, although REIT discounts may be overly punitive and not reflect what private asset sales can achieve.’
Looking more closely at Europe, Nachmann identifies a greater focus on ‘uplifting assets and improving energy efficiency’ than in other regions, which should contribute to the overall health of the sector.
Evolving Europe
PGIM is largely bullish on the prospects for European real estate. In its 2025 real estate outlook, the investment giant notes that total returns in Europe ‘have turned positive and are set to improve further on the back of stable yields and ongoing rental growth’.
It adds that liquidity is ‘still low but is set to pick up significantly in 2025 as interest rates fall further and investor sentiment picks up’.
The return to dealmaking should put investors in positive mood, it suggests. ‘There is a broad set of investment opportunities driven by rising values from a low base, ongoing low supply and structural demand growth.’
In turn, rental growth is likely to be driven by low supply metrics in key sectors, PGIM states. ‘Supply growth was low through much of the last cycle and has dropped on the back of elevated interest rates, high construction costs and lower values,’ the report notes.
It adds that ‘supply is set to fall below anticipated requirements based on our model’, pointing that this remains a consistent theme across European cities, with some of the greatest discrepancies in supply and demand in Spain and the cities of Berlin and Rome.
Deals incoming
PIMCO’s global outlook anticipates an improved environment but cautions against wholesale optimism. François Trausch, managing director, PIMCO Prime Real Estate, says: ‘Investors should keep in mind that in Europe, unlike in the US, interest rates were negative or close to zero from 2009 to 2022, and most market players got used to this. So while rates are coming down, they are not likely to reach levels anywhere close to what we saw after the GFC.’
He adds: ‘This requires a significant change in mindset: In our view, investors should not rely on low rates or decreasing cap rates, but focus instead on pockets of growth where rent and net operating income (NOI) will increase. This transition will take time.’
However John Murray, managing director, global private commercial real estate, sees ongoing, increased opportunities in areas such as private credit. ‘It’s still an attractive time to be a lender across the risk spectrum,’ he asserts. ‘Interest rates remain elevated, and property valuations and business plans have been disrupted given the weak economic backdrop.
‘In particular, we are seeing a lot more opportunities on the higher end of the risk spectrum for rescue capital and gap financing.’
Looking at specific asset classes, Murray adds: ‘Data centres remain at the top of my list, particularly in Europe. Demand continues to grow globally, but we believe in the convergence story in Europe, which is five to seven years behind the US in data centre capacity relative to its population.’
