Widespread macro-economic and political uncertainty has everyone guessing what cyclical changes we will see in global real estate markets in 2019 and beyond. Many are questioning whether the level of investment seen in the sector to date can be maintained. We believe that the simple answer is yes. Here’s why.

As the graph below shows, the current gap between average European Prime Office Central Business District (CBD) yields, and 10-year government bonds is wide by historical standards. The world is in a very different place from where we were a decade ago and paints a strong argument for the ongoing appeal to invest in real estate.

Property’s advantage over gilts suggests that any rising cost of money will not necessarily cause notable value shifts so long as the overall cost of finance remains relatively low, as is currently anticipated. Moreover, any perceived risk around rising interest rates does not lie in the rise itself, but rather the rate at which the rise occurs.

Average Prime Office CBD (Europe) vs 10-year bonds yield spread (Europe)

Real estate has come into its own in recent years as global investors have searched for income in a low return environment. Rising wealth in emerging economies means there is more capital at large and real estate is viewed as a relatively safe place for it. Investor motives remain, as they always have, a mixture of ‘wealth preservation’, capital appreciation and income return. 

Rather than reaching the top of the cycle, global real estate investment is operating in a flat period. The economic argument to continue spending, and to spend on real estate over other asset classes, remains. The challenge for investors will be finding asset classes that will deliver rental growth over the next five years.

As we grow used to operating in uncertain times, investors need to focus on the structural changes in property that create opportunities for growth, particularly where upward trajectories in markets will prove resilient against any wider downturn. Examples of this include the rise of e-commerce, the UK housing crisis, aging populations and global urbanisation. It brings us back to real estate fundamentals.

Further information 

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