Investors will get back to basics and relearn real estate in 2024

The current challenge for real estate is less the actual new higher level of interest rates – a level experienced 10 to 15 years ago – but the dynamic of the rapid shift from ultra-low rates to the current level

That is the view of Patrizia’s chief urban economist Marcus Cieleback who spoke to Real Asset Insight’s Richard Betts recently.

“We are coming from five to eight years of ultra-low interest rates, where people got used to that level of interest rates and they have to re-adapt to an environment that a lot of people in the industry haven’t seen before.”

He said that the possible fall in rates in 2024 indicated by the US’s Fed might mitigate some of the challenges, “but we are not returning to anything that is ultra-low as we have seen before the war started. It is a different environment, it’s much more about fundamentals.”

He added that going back to basics will mean relearning real estate “in the traditional sense”.

Despite increased bond yields, real estate does still have a role in a multi-asset portfolio. “If you look at a traditional 60/40 portfolio and you want to diversify, you need alternatives and real estate is a central element of these alternatives.”

However, it may be that fewer investors target real estate because ultra-low rates attracted investors to real estate that wanted cash flow, and possibly leveraged cash flow.

“This type of investor will not return in the coming years and therefore the volumes will go down,” Cieleback pointed out. However, investors may now be more driven by fundamentals, perhaps the typical analytical real estate investors that use property as a diversifierm, as a stabiliser and as an investment that secures a stable income stream with some kind of inflation protection.

As for the different property sectors, quality and location will be the focus. “We still need offices, but possibly not all offices, and not in all locations.”

He said that the urbanisation megatrend will persist making residential fundamentally strong and logistics will retain its following, buoyed up by responses to the supply chain threats.

There are opportunities too in retail. “We have food anchored retail, we have things like outlet centres, so we definitely shouldn’t write retail off, although it’s still in a challenging environment.”