PGIM is preparing to invest in global real estate again as yields correct and are “fast approaching” a range deemed “attractive for long-term buy and hold investing”.
The confident outlook on the market comes as the investor released its latest research on the market, in which it says several key factors are giving it conviction that global real estate markets are approaching a “turning point”.
Those factors include looser monetary conditions as it expects a reduction in borrowing costs as interest rates drop, solid occupier markets and a lack of supply.
The investment manager also turned to historical evidence for its confidence boost, saying that the pattern of the pace of decline suggests that values should start to stabilise by mid to late 2024.
“Our view is that global values will hit a trough in the middle of 2024,” says PGIM. “Using past downturns and recoveries as a guide, it is optimal for equity investors with longer-term strategies to deploy capital at or even just before the turning point, which reduces the probability of exiting investments in a future downturn.
“However, the expectation that capital growth will accelerate in an upswing means that strategies with shorter time horizons can expect to deliver their cyclically highest returns between 2025 and 2027.”
It added: “This period will be particularly attractive for value-add strategies focused on shorter-term asset repositioning, for example. A note of caution though: it is all about balancing risk and return. While it looks like global values are approaching a turning point, if there is another negative shock, there is a risk of lower returns from deploying today. This speaks to balancing between equity and debt exposure, with the latter offering much stronger protection against these inherent timing risks.”
PGIM’s report also suggests that investors use geography as their determiner of investment more strongly than asset class.
Its research places Korea, Singapore, Japan, China and Hong Kong as locations offering better total returns than logistics and retail. Portugal too is in its list of geographies offering positive returns.
“During the last cycle, geography gave way to sector as the dominant driver of relative performance on the back of the global rise of e-commerce and its associated industrial versus retail play,” says the report. “This accelerated during the pandemic but is now easing. Changing international trade patterns, along with region-specific shocks and differential regional responses to global events, are leading to diverging country and regional returns.”
On a sector basis, the report says a lack of supply and ownership affordability is driving growth potential in single-family housing in the US sunbelt and in the UK, that nearshoring is driving increased trade between the US and Mexico – a boon for Mexico industrial in border areas – that a strong demand and lack of supply for data centres will drive continued outperformance and that development of energy-efficient hyperscale centres with an operating partner will be best route to market, and that a strong recovery in travel demand and subdued supply is driving rapid growth across European hotels.
In the offices sector, the bifurcation of the market continues to dominate, with CBD-based offices, outperforming those in non-CBD locations. PGIM says this trend means that places like London and Stockholm provide income resiliency alongside the potential for higher rental growth.
Read the research in full here.
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