New opportunities in real estate demand a global view

Falling global interest rates have provided relief for rate-sensitive sectors, particularly real estate. With valuations significantly adjusted, the asset class now presents an attractive entry point for investors seeking exposure.

Emerging real estate sectors tied to long-term global megatrends like aging populations across advanced economies, healthcare trends, and technological innovation, offer investors an asset class less reliant on economic growth and one that could offer potential returns driven by structural shifts.

This shift coincides with a changing of the guard in terms of product structure as a new generation of products targets the operational requirements of wealth managers.

Emerging sectors tap into growing secular trends

The next decade of real estate will look different to the previous 40 years which had been dominated by office and retail. Now, as the cost of debt is coming down and valuations are probably near a bottom, opportunities emerge from alternative real estate sectors.

The aging population, rising life expectancy and declining birth rates in advanced economies are one example of trends steering changing demand patterns for care facilities, senior residential housing and medical offices.

Alternative property types, which include self-storage, manufactured housing and outpatient care facilities, are thus favorably positioned for future resilience and outperformance as their fundamental demand drivers rely less on economic growth and more on long-term tailwinds. One of the biggest drags on real estate returns is the cost of maintaining a real estate asset. On average, these costs are lower for alternative sectors (13%) than traditional real estate sectors (20%)*.

Future real estate portfolios that allocate to alternative property types could not only benefit from enhanced diversification, but also from superior resiliency. Growth in data centers is another emerging trend driven by rising consumption of online content, big data, and companies migrating their data to the cloud. In the US market, demand — measured by power consumption to reflect the number of servers a data center can house—is expected to reach 35 gigawatts by 2030, up from 17 GW in 2022, according to McKinsey analysis.

While data center development in Asia Pacific currently trails that of North America and Europe, Asia Pacific growth prospects are underpinned by rapid population growth and a young demographic. The Asia Pacific data center colocation market is estimated to expand at a compound annual growth rate of over 13% by 2026, outpacing growth rates of 7% in North America and 12% in EMEA.

Changes in product align with evolving needs

When investors last looked at real estate in the pre-pandemic era, they focused on office and retail in domestic markets, over alternative and global options.

However, in this market cycle there are different products and more choice coming to market; investors may now allocate to a semi-liquid fund, long-term asset fund (LTAF) or a hybrid product. LTAFs and other structures aim to solve and avoid the mismatch between daily dealing funds and property and can help reduce public market volatility.

Monthly liquidity products could help wealth managers with their operational requirements while also keeping the integrity of the underlying assets.

Time to reevaluate your allocation

Real estate is now an attractive asset class due to the combination of valuation and duration. In this environment, alternative real estate can give a meaningful return and can add duration with some stability. Investors today may consider fresh allocations to the private real estate market to bring their allocations up to a strategic weighting. Over the long-term, private real estate offers low correlations to other asset classes, strong income returns, and a degree of inflation-hedging.

There is also the geographic side to allocation. Traditional property allocations were usually only in UK property. However, if managers maintain a UK-only perspective, they are limiting their opportunity set. There are compelling real estate opportunities on a global scale and investors often cannot access growing megatrends through buying a UK-only product.

For example, multifamily assets in US cities with strong supply-demand dynamics around multifamily homes are well positioned for growth, capitalising on demands from millennial and middle-income renter markets.

Real estate is an asset class with diversification benefits that are difficult to obtain from public markets. The opportunity for growth is different to equities because there is an income component and low volatility. Investors may also benefit from the inflation protection from inflation-linked cash flow. As such, it could be especially relevant for clients in a decumulation phase; and those nearing or in retirement that are looking for the potential for capital preservation combined with income and a degree of growth.

Whether you’re a wealth manager, family office or private bank we can partner with you on innovative investment strategies or bespoke solutions across public and private assets.