abrdn expecting new growth phase in the real estate sector

Publishing its Q4 Real Estate House View, abrdn that said they believe that Real Estate has turned a corner and is moving into a new growth phase, with a rebound imminent as rate cuts start to come through.

abrdn has upgraded its investment view on real estate from neutral to overweight for the first time since June 2022. While there can be no guarantees, abrdn forecasts UK annual total returns of 8.6% over the next three years.

Anne Breen, Global Head of Real Estate at abrdn, says: “We have been monitoring the real estate market closely for signs of a true turning point, and just three months since we upgraded our outlook from underweight to neutral, it has arrived. The “pivot” to a better outlook has been powered by REITS, which are raising capital for growth, together with a more benign interest rate outlook, and demand for quality assets supporting rentals.

“We have been flagging for several quarters now that the market is grinding onto a better footing, and the favoured segments of logistics, residential, and alternatives capture a lot of these returns, but even offices aren’t as downbeat as they have been. We even see some notable upside risk over 2025 if certain macroeconomic components behave.

“In the UK, there is the Autumn Budget to get through, with speculation that capital gains and inheritance tax will be targeted. Tighter fiscal policy for public investment reinforces the importance of private capital to play a role in solving some of the UK’s issues around affordable and social housing shortfalls and expanding other critical infrastructure. Ultimately, we don’t see a lot standing in the way of a return in capital to UK real estate.”

REITS, Rents and rates

REIT performance is a good lead indicator for direct real estate, with a focus on capital raising for growth rather than balance sheet repair, a sign of renewed confidence. This is when good times in direct real estate are often expected to roll, typically 6-9 months later.

In Europe, REITs have been steadily issuing equity and unsecured debt too – signalling the end of the era of refinancing challenges and the start of the expansion era.

In direct real estate, bidding pressures are rising. Rents continue to grow across sectors and the lower cost of capital supports a much more attractive entry point for investors. Residential rents increased by 6.7% over the year to June, and logistics by 6.6%. Yes, the pace of growth has slowed for logistics, but reversion potential will be around for some time. Core assets in Germany, Spain and the Netherlands are generally coming in above asking price as bidding intensity ramps up.

The yield premium on real estate, especially as policy rates are being cut, is attracting capital back into the sector. Despite an expectation the Bank of England will cut interest rates more gradually than other central banks, abrdn still forecasts c.100bps of cuts in 2025. This will feed through to real estate pricing and abrdn anticipate a bounce back in performance next year.

Offices

In office spaces, London West End offices are warranting more positive sentiment, with a turn in performance data. The market is seeing more activity, with the focus on high-quality office spaces with strong demand. Prime rental growth is significant in markets like Bristol and Manchester, indicating a preference for top-quality spaces as tenants consolidate their premises.

Whilst global recession and geopolitical risks have risen during the quarter, momentum in the market is stronger. With a deep valuation correction across global real estate markets largely in the rear-view mirror, especially in the UK and Europe, and in the office sector and with dwindling quality supply available, the market now has capacity to perform.

abrdn UK All Property total return forecasts (% p.a.) – rolling from Q3’24

Favoured sectors

Looking at abrdn’s favoured sectors, yields for Industrial and Logistics are showing stability after sharp correction and are expected to sharpen as investors target the sector’s strong fundamentals. Sentiment towards the sector is positive but abrdn note this is not sector-wide with capturing rental value growth or reversion remaining a key thematic.

In the Residential sector rental value growth remains positive and moderating in-line with abrdn expectations for the private rented sector. It is forecast headline rental growth has peaked but expected to continue at solid levels.

Retail warehouses have already been performing well and are expected to be the retail segment of choice amongst investors as the market gathers pace. Attractive yields, low vacancies and stabilising net operating income support a more appealing entry point for investors.

While sectors will remain critical for driving relative performance and for sourcing assets that can deliver the best of what the asset class has to offer, quality and sustainability considerations will be critical too.

As we adapt to Minimum Energy Efficiency Standards (MEES) and approach Net Zero deadlines, decarbonisation and retrofitting costs need to be accurately appraised when underwriting new acquisitions. These costs can severely impact returns if not carefully accounted for. Assets that are already compliant have a strong head start and will ultimately be favoured by occupiers and investors in the future.