Research Briefing | Oct 25, 2023

Commercial real estate relative return index signals opportunities in 2025

Our new global relative return index (RRI) signals that commercial real estate (CRE) investment opportunities should slowly and selectively emerge next 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.

What you will learn:

  • The industrial sector leads the way with a neutral returns classification next year, up from a subpar classification this year; all three regions – Asia Pacific, Europe, and North America – signal risk-adjusted return opportunities. Other sectors with positive prospects include residential and hotels, with the former driven by Asia Pacific and North America, while Asia Pacific mainly drives the latter.
  • Our view is predicated on CRE valuations reflecting further yield expansion by end-2024 and 10-year bonds gradually moving lower over 2024-2027. This would increase global yield spreads from just 70bps in 2022 to 150bps by end-2024, and then to 180bps by end-2027. We anticipate that by 2025, recovering economic growth and low development supply will support moderate nominal rental growth.
  • If rates stay high for longer – a plausible downside scenario – this will increase required returns and cut expected returns, delaying the emergence of market-level risk-adjusted return opportunities. This scenario is likely to impact low-yielding markets the most due to their sensitivity to changes in the risk-free rate.
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