Relative return index signals improving CRE attractiveness

Our latest global relative return index (RRI) signals that risk-adjusted investment opportunities in commercial real estate (CRE) should start to emerge this year before becoming more widespread in 2025. At this point, our baseline expected returns move higher than required returns, pushing the global all-property index above the 50 mark.

• We forecast higher bond yields this year relative to 2023 in most advanced economies as markets price out rate cuts. This lifts our required return estimation, but this is offset by lower illiquidity and occupier risk of default risk premia.
• In contrast, our outlook for global CRE 5-year total returns has significantly improved this year compared to 2023. This has resulted in a narrow spread between the two components, but still negative, leading to a neutral classification in 2024.
• Global sector rankings remain consistent with 2023, with hotels and industrial leading, both are classified as neutral. Industrial is projected to transition to the excess return classification by 2025. Asia-Pacific emerges as the most attractive region, led by Japan. North America’s RRI classification stays subpar, while Europe improves, particularly in the industrial and retail sectors.
• If rates stay high for longer – a plausible downside scenario – this will increase required returns and cut expected returns. As a result, the negative spread to the required return would widen, making CRE unattractive and delaying the emergence of market-level risk-adjusted return opportunities.