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Investment outlook

Real estate 2019 outlook

Alice Breheny
Head of Research, Real Estate
Buildings with clouds

Real estate fundamentals are expected to remain solid in 2019, despite the market’s late cycle, rising interest rates and structural change disrupting the industry, most notably the retail sector. Positive global growth forecasts and an overall balance of supply and demand continue to support net operating income and property values. Commercial real estate continues to attract new capital, with stable income returns generally exceeding those available in fixed income. However, little or no capital appreciation can be expected, and putting new capital to work will be challenging in 2019.

Structural change driven by demographics, technology and consumer trends are creating opportunities to add alpha. We expect global cities benefiting from advanced technology, sustainable development and rising urbanisation to outperform through the next market cycle. The upheavals impacting office and retail are generating demand for high-tech buildings with flexible office space and light industrial warehouses. We believe some of the best opportunities exist in alternative sectors, such as data centres, purpose-built student housing or manufactured housing.

Globally, residential apartments are benefiting from strong demand among middle-income families and millennials priced out of home ownership. Global real estate debt’s stable income returns and lower volatility offer risk protection for real estate equity portfolios.

Risks to the outlook include underestimating the need to ‘future-proof’ portfolios by incorporating exposure to emerging new sectors, and ‘future-proofing’ buildings through the smart use of technology to ensure they remain relevant and sustainable. Sustainability will be increasingly important to occupiers, investors and consumers alike and will have a significant impact on the attractiveness of buildings.

We favour investing in 90 global cities offering scale, growth, sustainability and resilience. Sector wise, we favour real estate debt, logistics, apartments, student housing and manufactured housing. 

Offices outlook

40 Leadenhall

The office sector is undergoing a structural upheaval which will continue in 2019 and beyond. Co-working trends have been the talking point of 2018. The expansion of WeWork, and other collaborative work space operators, has boosted demand in major cities across the globe and should continue to do so in 2019. Tomorrow’s world offices will need to be flexible, cost effective buildings that generate positive externalities through collaboration and knowledge sharing.

Millennials and Generation Z will comprise 75% of the developed world workforce by 2035, and they are already driving significant change in the office sector. These generations demand flexibility and agility in terms of when, where and how they work and place a huge emphasis on collaboration and knowledge sharing. As a result, the office sector has been undergoing structural transformation and this is expected to continue to evolve in 2019 and beyond. Offices therefore need to be flexible, cost effective and able to generate positive externalities for their occupants. Flexible office operators were the talking point of 2018, engaging in a race for space and characterised, in particular, by the highly-acquisitive leasing programme of WeWork. These operators have boosted leasing demand in major office centres across the globe. It will be interesting to see how flexible space fares when the business cycle becomes less supportive, but for now it is clear that the recent trend will continue, supporting rental growth in selective markets.

Core assets in established locations, or improving locations in established cities, should prove resilient through the next cycle. Investors with office portfolios which focus only on global gateway cities may not benefit from geographical diversification – their performance tends to be closely correlated with advanced nations’ economic growth. Real estate in cities with broader-based economies, which are less responsive to global financial conditions, should prove more resilient in the event of a global slowdown.

Retail outlook

Edinburgh St James 

Retail is arguably the most challenged sector globally, and 2019 is likely to be the moment we see the true impact of e-commerce on real estate demand and pricing. Some developed economies have already seen valuation declines for retail and investment volumes have fallen away dramatically. Many mature markets are already over shopped, and with the rapid growth in e-commerce, the need for physical stores is being eroded rapidly. Consumers have more choice than ever before, and millennials are choosing not to invest in material goods.

Once considered a core component of an institutional real estate portfolio, with its diversification benefits and low volatility, investors are now considering the role retail has in their strategies, if indeed it has a place at all. While headlines around retail are rather alarming, we do indeed believe retail has a place in a real estate portfolio. There are people who very much enjoy shopping but they will become increasingly discerning about where they shop. And accessible needs-based retailing will still be very much in demand. Owners of shops and malls will need to work hard to ensure their assets remain compelling and relevant for tomorrow’s consumer. Destination malls, designer outlets malls and historic or high-profile high streets will still appeal to shoppers and should weather better during the next market cycle. While accessible retail in high-footfall locations i.e. adjacent to train stations or on commuter routes, or retail that forms part of a mixed-use estate, should remain very much sought after by retailers. Investors in this sector need to be more creative in understanding and underwriting assets as traditional measures of rent affordability or covenant attractiveness are no longer valid.

Logistics outlook


While retail struggles against structural headwinds, logistics is enjoying cruising in its slipstream. E-commerce continues to drive demand for logistics space and investors continue to increase allocations to the sector, driving prices to all-time highs. While pricing implies logistics is fully priced, the structural change in the sector and the nature of the activities happening in these logistics buildings means it is unfair to compare today’s pricing to that of previous cycles.

A change of direction is not yet on the horizon for this sector, as medium-term rental growth expectations and the long-term outlook remain strong globally. The wave of e-commerce, re-tooling of supply chains and modernisation of logistics premises rolls over the globe fuelling demand at all levels and across geographies.

Despite the enduring structural demand story for logistics, investors cannot afford to be complacent and fierce competition should not force indiscriminate investment across the sector. Consumers’ rising expectations for speed and cost of shipping and the response from third-party logistics providers and e-commerce operators, means their real estate requirements are evolving rapidly. Buildings need to be increasingly sophisticated, robotic and strategically located to service as many people in as short amount of time as possible. Longer term, the introduction of autonomous vehicles will certainly change the logistics landscape globally.

Housing outlook

Pointe Crabtree

In the U.S., the current homeownership rate stood at 64.4% as of Q3 2018, below its historical average of 65.2% due to a lack of affordability and demographics. Across all age cohorts, the current homeownership rate is below its historical average, but the difference is most stark for those aged 35 to 44 years. We expect middle-income households to represent a stable and sustainable long-term source of demand for apartments.

Class A and luxury apartments in urban areas across the U.S. present a buying opportunity as prices correct in this segment. Oversupply in this segment, as well as older millennials moving to the suburbs from urban rentals, are contributing to falling prices in the urban class A and luxury apartment market.

The U.S. provides the greatest depth of opportunity in the residential sector, whereas in other parts of the world, the residential is a less established institutional investment sector. Nevertheless, the themes that drive demand are global. Urbanisation continues at a pace, even in developed economies, and the associated need for accommodation is clear. Cities with the ability to attract global talent and cities that are growing through inward migration ought to benefit from long-term demand for residential.

Investors should look for scalable opportunities to access the housing sector and monitor closely the trends impacting the sector. Demand for flexibility and freedom among millennials could see new forms of residential emerge, such as collaborative living.

Alternatives outlook

Elderly population
In our view, investing in selective ‘alternative’ sectors can provide investors with both alpha and diversification. Real estate sectors that are underpinned by long-term demographic drivers should prove complementary to more traditional, cyclical-driven sectors. A clear opportunity exists to provide for the rapidly-ageing global population. Poor provision of purpose-built student accommodation in many cities, coupled with strong growth in international student numbers, makes a compelling case for investment. Manufactured housing is an alternative property type that benefits from nearly unlimited demand and minimal supply. This sector generated double-digit total returns in the last five years and is on track to produce similarly strong total returns in the next five years, given the supply and demand dynamics.

There are copious opportunities to explore in this space and we anticipate 2019 being the year a lot of investors turn their attention to this, seeking to reduce exposure to more traditional sectors, where technology is reducing demand, in favour of sectors driven by durable demographic trends. Alternatives have always been termed niche, because they are small, and deemed risky due to the need for an operating partner. But the operating partner is very much in vogue at the moment (e.g. WeWork), and a model the industry needs to embrace. Thinking about the drivers of demand, alternatives could be tomorrow’s core – do we need more retail space? No. Do we need more provision for the elderly? Yes. Perhaps 2019 will be the year we cease to call these sectors ‘alternative’?