Where are we in the global economic cycle?
Having established the valuation opportunities that are available in markets right now, let’s take a moment to reflect on the potential direction of economies going forward.
Central banks spent 2023 fighting inflation, and the challenge now will be keeping it under control. While the annualised rate of price increases has slowed globally, it remains clear that some underlying pressures persist.
With this in mind, financial markets are adjusting to two key realisations. The first is that interest rates are likely to remain elevated for longer than previously hoped. The second is that economic growth is unlikely to recover significantly in the near term.
The decline in GDP growth going forward may weaken demand for some real estate sectors. However, even in a slower growth environment, occupational demand from some tenant groups will remain strong. At Invesco, our investment strategies focus on identifying these opportunities, which we describe in further detail below.
Conviction investment drivers: 2024-2025
To succeed in a volatile economic environment and benefit from the valuation opportunities available, we believe investors will need to shift their investment strategy. Recent history has seen persistent trends in the relative performance between real estate sectors. However, our conviction is that sector allocation will break down as the dominant driver of returns going forward.
At Invesco, we have stopped thinking in terms of the four large sectors: residential, industrial, retail and offices. Instead, we think about sub-sectors and how assets are positioned within smaller niches. For example, the industrial sector sees huge variation in the return outlook between research and development space, cold storage, and urban distribution. In other words, the details matter.
Going forward, asset-specific returns will be driven in part by clear business plans and a disciplined approach to delivering these. But net operating income (NOI) growth is also strongly shaped by secular trends, which drive changes in the relative demand patterns over time. This includes shifts in the tenant landscape, which are further exacerbated by changes in financial markets.
We have identified four key trends that we believe will shape real estate investment over the short and medium-term.