Schroders Capital’s H1 2024 Investment Outlook: Uneven geographic and sector repricing to create window of opportunity

Global real estate value corrections over the past 18-24 months have created a window of opportunity to access repriced markets, according to Schroders Capital’s H1 2024 Investment Outlook for real estate.

Investors have had to contend with higher interest rate levels, muted economic conditions and heightened geopolitical tensions in recent months, but now face the prospect of a sequential opportunity set to tap attractively repriced assets, with more anticipated to emerge.

Kieran Farrelly, Head of Global Solutions Real Estate Schroders Capital, said:

“The uneven pace and depth of adjustments across geographies, sectors, and investment structures is ushering in a cyclical buying opportunity. Spotting a market trough is a difficult task but both historical performance and our proprietary market valuation framework indicate 2024 and 2025 will become vintage years for real estate investment, both on the equity and debt side.”

Schroders Capital’s real estate market valuation framework is signalling immediate opportunities in markets that have experienced the fastest repricing, such as the UK and Nordic region, followed by the US and other Continental European markets.

Industrial and logistics assets have now largely rebased to attractive price points in most submarkets, supported by strong structural fundamentals. In the Asia Pacific region, cyclical opportunities are available in markets that are in step with China’s delayed recovery and/or offer alternatives in the nearshoring/friendshoring of supply chains. Prospective returns in Europe are also particularly compelling.

Kieran Farrelly added:

“We continue to favour operational property types that have strong demand-side tailwinds and can deliver inflation-linked income, either directly or indirectly. There is growing recognition that the composition of real estate portfolios is evolving and the ability to create the ‘core of the future’ across a range of segments adjacent to the traditional staples of offices, retail, industrial and multifamily is offering a range of compelling early mover opportunities.”

While a more extended period of elevated interest rate volatility continues to weigh on markets, other developments give cause for optimism. Many major economies have made great strides in reducing inflation, with a significantly lower impact on growth than markets had previously expected.

Occupational markets, moreover, remain on a solid footing, with nominal growth expected across most real estate segments, especially those supported by structural tailwinds. While demand has softened, tight supply conditions – due to higher construction and debt finance costs – continue to support sustainable rental income levels, and the scarcity of high-quality ESG-compliant space will fuel renewed rental growth, especially once economies have turned a corner.

Opportunities arising from debt capital market illiquidity and stress are also becoming increasingly visible. Private real estate debt pricing levels currently offer ‘equity-like’ returns from newly originated financings and should be proactively targeted given the limited downside risk. Related to this are opportunities requiring capital solutions to adjust and/or reinforce existing entity or transaction structure balance sheets so they can withstand a higher interest rate environment and/or refinancing levels.

Kieran Farrelly concluded:

“We see significant relative risk-adjusted value in newly originated senior whole loans and development loans, structured to incentivise ambitious, predetermined sustainability performance objectives. This is a new private capital opportunity to drive positive social and environmental outcomes in a market that is increasingly supply-constrained due to intensifying regulatory requirements and shifting tenant demand. Pending refinancing waves are expected to accelerate the availability of these opportunities amid further price discovery through 2024.”