3-minute guide to global property market in 2024

Juliet Schooling Latter 04/07/2024 in Property

Will the second half of 2024 be lucrative for global property markets after a torrid few years with Covid-19, geopolitical problems and economic instability?

Well, the early signs certainly appear encouraging, with interest rates starting to stabilise and M&A activity expected to increase. But is now the time to get involved? Should part of your overall portfolio be reserved for real estate exposure or are there still too many variables?   

Here we examine the main drivers for this often overlooked sector – and highlight three portfolios that could be worth considering.

Property overview

Property remains a popular investment option for many people, according to a report from Savills, the London-based real estate company. “The total value of the world’s property stood at $379.7 trillion at the end of 2022,” it stated. “Although this is 2.8% less than the year before, the longer-term trend – a rise of 18.7% over the past three years – shows that global property remains a significant store of wealth.”

Investors can get exposure through actual bricks and mortar – in the form of rents and property valuation increases – and buying the shares of property-related companies. However, UK fund investors have been rather less enthusiastic about property as an asset class due to the economic issues we’ve been experiencing.

In fact, the amount in the IA Property Other sector has fallen from £12 billion to £11.4 billion over the past year, while assets in IA UK Direct Property have shrunk to £4 billion from £5.6 billion*.

However, there are signs that investors may need to reconsider their stance towards property, particularly now that the economic backdrop appears to be calmer.

According to JLL, a real estate advisor, the global economy has proved to be resilient during the first quarter of 2024 – despite geopolitical uncertainty and changing interest rate outlooks**. It stated: “Growth remains subdued by historic standards, but as inflation eases further and the timing of policy rate reductions becomes clearer, momentum should build through the second half of the year and into 2025.” They also cited a 7% year-on-year rise in global leasing volumes, along with “robust retail and hospitality demand”, boosted by growing international travel and rising real wages**.

A growing optimism

There’s also growing optimism among dealmakers for an uptick in real estate M&A activity, according to a mid-year sector outlook from PwC, the professional services group. Tim Bodner, global real estate deals leader at PwC in the US, suggested developments were attracting non-traditional investors, such as sovereign wealth and infrastructure funds***.

“They are stepping in to fill the funding gap amid the pullback from traditional bank and life insurance investors,” he wrote. Although he pointed out that global real estate deal volumes declined in the first quarter of 2024, he believes forthcoming interest rate cuts will help drive interest.

“Overall, it is anticipated that there will be an increase in real estate M&A transactions in 2024 as existing investors adapt to the new operating environment and opportunistic investors capture new investment opportunities,” he said.

The optimistic air was echoed in an update by BlackRock, which believes a “meaningful recovery in transaction volume” will occur this year after a muted 2023****.

“The global real estate market appears to be emerging from the most recent downturn in capital values,” it stated. “Interest rate stabilisation is providing some clarity to pricing and driving more buyers to the table.”

According to Craig Wright, head of European real estate investment research at abrdn, the US should achieve a soft landing, while the UK and Eurozone will be helped by real wage growth^. “We expect major DM (developed market) central banks to begin interest rate cuts around the middle of this year,” he said.

Three ways to play property today

Here we highlight three funds to consider for exposure to property and our first suggestion is focused on the UK. The TIME:Commercial Long Income fund aims to provide a secure and stable investment return through primarily acquiring commercial freehold ground rents and properties with long leases. It gives investors an alternative source of income, while the combination of long leases and ground rents provides a very stable backdrop in comparison to many other asset classes.

Hotels and leisure locations are the favoured sectors, along with exposure to supermarkets, healthcare sites, nurseries and retail warehouses. Meanwhile, its properties include activity provider PGL’s centre in Liddington, Swindon, as well as Southend’s Holiday Inn and Peterborough’s Premier Inn^^.

The team behind the fund says: “Transactional levels in the real estate market were very low in 2023 but activity is expected to return to a more normalised state during 2024, as further clarity on factors such as interest rate levels become visible and confidence increases around real estate.”

Europe has already started on its rate-cutting cycle. As such, European exposure can be useful. CT European Real Estate Securities fund, which is managed by Alban Lhonneur and Marcus Phayre-Mudge, is one option. The fund, which invests in real estate securities listed in both the UK and Europe, has one of the best resourced and most experienced teams around. It also benefits from having a variety of investment tools at their disposal, including the ability to short unfavoured names. This enables them to better express their views.

The highest geographical allocation of the fund is currently in the UK (35.9%), followed by France (21%), Germany (17.5%) and Sweden (14.5%)^^. Industrials has the most significant sector allocation, while the 10 largest individual positions include Klepierre, one of Europe’s biggest shopping mall operators^^.

Finally, for those who favour the closed-ended structure for property, there’s the TR Property Investment Trust that’s also run by Marcus Phayre-Mudge. This trust invests in the shares of property companies of all sizes and typically focuses on those located in Europe and the UK. A small amount will also be invested in physical UK property.

Its diversified portfolio includes everything from industrials and German residential sites to European shopping centres, French offices, and student housing. While the trust’s share price tends to be volatile, this volatility has been well rewarded by the returns achieved over the long term. Given its focus on investing in property shares, the trust could make an excellent complement to a bricks and mortar portfolio.

It’s important to note, this is still a market where it is wise to tread carefully. While it should be a source of steady, inflation-adjusted income and stable capital growth, it has been through an unusual period. Where property companies have debt, they will need to refinance at considerably higher rates when that debt expires. ‘Problem’ debt is rising in the commercial property sector^^^ meaning it’s important to stick firmly to the higher quality end of the market.

Research all Elite Rated property funds and trusts

*Source: The Investment Association, monthly statistics, April 2024 and April 2023

**Source: JLL, Global Real Estate Perspective, May 2024

***Source: PwC, Global M&A trends in real estate, 25 June 2024

****Source: BlackRock, Global real estate outlook, April 2024

^Source: abrdn, Global real estate market outlook Q2 2024, 29 April 2024

^^Source: fund factsheet, 31 May 2024

^^^Source: Bloomberg UK, 2 May 2024

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.