Real estate: Navigating short-term volatility with long-term assets

Our Invesco Real Estate (IRE) investment approach focuses on optimising both income yield and income growth. When targeting property income growth, we look for assets and opportunities which are either supported by long-term structural drivers of occupier demand, or where active asset management can enhance cash flows. This approach enables us to reduce our reliance on cap rate movements as the driver of returns. Because the spread between real estate cap rates and interest rates, even adjusting for expected rate cuts, remains tight relative to history in many markets, it’s a key consideration.

How we assess opportunities

Geopolitical shifts continue to make the outlook volatile. To determine how these trends could impact property investments across the globe, and to identify areas of  greatest relative value and opportunity for value creation, we look at:

• Potential impacts on structural growth trends and the implications for sector-level real estate income growth.
• Economic growth in different countries, and implications for market-level real estate net operating income (NOI) growth.
• Potential for real estate cap rate compression to drive value growth.

Achieving higher real estate returns than local market averages requires enhanced asset-level income growth and secular demand drivers that can help offset potentially slower economic growth. Strategic market selection is important, given the historically wide performance gap between top- and bottom-performing markets. We believe a disciplined approach to asset selection and strong local knowledge could position IRE to deliver relative outperformance.

Investment considerations for 2026

Identifying income trends starts with examining structural growth patterns that drive real estate occupancy demand, including demographics, technology shifts, and sustainability requirements. Then, we assess how these longer-term secular trends might be impacted by shorter- or medium-term changes, including:

• Tariffs and trade flows. Real estate demand will be impacted if global trading patterns change or if tariff-driven inflation affects consumer spending.
• Immigration and demographic changes. Long-term demographic patterns influence real estate, and short-term immigration policies impact demand.
• Housing demand and relative affordability. Most global markets have seen limited new supply, which has led to increased home prices, stretching affordability for many households.
• Construction trends. Elevated interest rates and tight availability of construction labour continue to weigh on development cost and execution, limiting new supply.
• Artificial intelligence (AI) and technology. Real estate requirements evolve as technological innovations affect both location demand and building usage.
• Climate risk. Ensuring the resilience of real estate assets requires a focus on sustainability and climate protection.

After identifying the scope for income growth, we consider the relative pricing of real estate investments. We see potential price impacts from shorter-term factors such as:

• Inflation and interest rates. Steeper yield curves limit the scope for real estate cap rates to compress.
• Cross-border capital flows. The gap between the US real estate market and other markets would mean that a reallocation of capital out of the US would have a significant market impact in other global real estate markets.

Plus, longer-term, we’re also seeing changes in investors’ return requirements. The last decade saw ultra-low interest rates and global diversification, which created an environment of low risk and therefore low required returns. Now, investors are seeking higher returns to compensate for the increase in risk.

Current pricing focus

After identifying the investment opportunities, it’s important to consider current market pricing. Across global real estate markets, certain sectors, particularly residential sectors in many markets, are already seeing tight cap rates, and in turn, lower income returns (driven by investor interest/capital flows), which are less likely to see cap rate compression. Meanwhile, some “out-of-favour” sectors, previously retail, now office, have initial higher income returns. This also enables investors to add accretive debt to potentially enhance returns. Investor interest in real estate is rising, which increases the probability of seeing some yield compression in the near term.

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