As we step into the promising landscape of 2024, the real estate market stands at the intersection of innovation, growth, and resilience. The past few years have witnessed dynamic shifts in the industry, influenced by technological advancements, changing work dynamics, and a renewed focus on sustainability. In the midst of these transformations, the theme for real estate enthusiasts is one of optimism and opportunity.
“Real Estate 2024: Reasons to be Cheerful” is more than just a reflection on the current state of the housing market; it is a celebration of the positive trends and developments that are shaping the industry. From the rise in property values to the integration of cutting-edge technologies, this blog will delve into the factors contributing to a buoyant real estate environment.
Join us on this exploration as we unravel the reasons why 2024 is a year to be cheerful for homeowners, investors, and industry professionals alike. From the adoption of sustainable practices to the evolving nature of work culture, we will uncover the driving forces that are propelling the real estate market into a future filled with promise and possibilities. So, fasten your seatbelts as we embark on a journey through the exciting landscape of Real Estate 2024.
WEIGHT OF CAPITAL
DRY POWDER
A mountain of dry powder has been waiting for valuations to fall. All markets go through cycles. There are reasons to believe that some investors will see opportunities on the other side of the holiday season while everyone else is still recovering from a hangover.
GLOBAL CAPITAL
Global macroeconomic events over this past 18-24 months have caused capital to accumulate in petrostates such as the UAE and Saudi Arabia, which have historically had a robust allocation to European prime real estate. Investors from these jurisdictions are often all-cash buyers and are poised to take advantage of current market conditions. Aldar’s recent $291m acquisition of UK developer London Square is a sign of things to come in 2024.
MATURING FUNDS
Fund managers have been allowed some forbearance by institutional investors but a more stable and liquid market will allow managers and investors to move on through realisations. The growth of the real estate secondary market will provide a further avenue for liquidity.
EMERGENCE OF ALTERNATIVE LENDERS
The banking sector has faced capacity constraints and a reduced appetite for risk but investors now have a greater choice of increasingly active alternative providers of debt and quasi-debt often supported by banks through loan on loan facilities. As a result there will be more competition to finance deal activity.
MACRO-ECONOMIC CONSIDERATIONS
MATURING DEBT
There are a huge number of real estate loans maturing through 2025 including at least:
Declines in capital values and the increased cost of debt will impact refinancing options and generate distressed opportunities with lenders pushing for consensual sales and turning to creative enforcement strategies where necessary.
WeWork filed for bankruptcy protection in the US in November paving the way for re-possessions and distressed sales globally and a spectrum of opportunities for competitors and investors.
Soaring inflation has reduced more quickly than expected on a sustainable basis. Although there is further to go to achieve central banks’ long term targets, the direction of travel is down.
Interest rates have peaked. Conventional wisdom is that they will stay higher for longer but it seems more likely than not that rates will start to come down in 2024 resulting in a better deal environment.
Falling treasury/gilt yields will make investment in real estate more appealing while capital value corrections have left real estate yields looking increasingly attractive. This combination could lead to some prospective cap rate compression.
Occupational demand across many sectors remains buoyant. Even in less fashionable sectors such as offices, continued momentum behind the return to office working is supporting take-up.
Rental growth has been stronger than expected for prime assets in many sectors. This combined with increased cap rates due to higher gilt yields will attract investors seeking to underwrite opportunities with higher operating yields and projected total returns.
Construction costs have fallen sharply in the second half of 2023 following a well-documented price spike. This was in spite of the decline in availability of certain materials. Falling construction prices will finally feed through into build costs in 2024.
Building owners, operators and occupiers have obligations to decarbonise. The conventional view is that this is difficult, laborious and expensive to achieve but the path to net zero is becoming better understood and more affordable and reliable and the commercial benefits of achieving it are becoming more apparent. What some see as a challenge, others will see as an opportunity.
Buildings may be experiencing obsolescence bought about or accelerated by a range of factors including Covid, new working patters, outdated design features, rules and regulations or technology and automation. In some cases repurposing will become an option for rejuvenating a property. Some offices have already been repositioned for residential or life science use.
Europe is facing some long term growth and environmental challenges and there is a broad political consensus around the need for a strategic approach to improving infrastructure for the future (from data to transport) even if there are disagreements about priorities. Whether this is achieved through de-regulation, planning intervention or public investment, this will present opportunities for brave investors and developers.
AI is starting to transform the real estate industry whether by reducing use of energy, lowering the carbon footprint of a building and optimising operating costs or by speeding up the construction of buildings. It may not be a silver bullet but nor was internet connectivity 30 years ago. AI and technology generally will also continue to drive the need for functionally excellent and well-located data centres.
Global hot spots and growing protectionism has resulted in companies and Governments increasingly resorting to near-shoring and friend-shoring to immunise supply chains from future shocks. This trend will continue to affect the real estate sector, most notably prime logistics assets which have continued to enjoy high occupancy and positive rent rises.
More deal flow will generate more data, provide buyers and sellers with more pricing certainty and confidence about transacting which in turn will generate deal flow and create a virtuous deal circle.
Most investors forget that markets are cyclical or do not have the risk appetite, investor support or conviction to be early adopters but the real winners begin to buy from tired investors at low prices when the general mood is still bearish. This may be a bet against general market sentiment or a bet against sentiment in relation to particular asset classes. As night follows day others eventually get on the bandwagon resulting in yield compression which in turn will attract the laggards and give early movers opportunities to cash in and achieve strong returns. The lethargy of 2023 provides a perfect launch pad for dissonance among investors.
Finally…. Twiddling your thumbs? Spending too much of your day doom scrolling? When opportunities arise as the restructuring cycle picks up, investors will not want to miss out. Boredom coupled with FOMO could lead to a surge in activity and a robust deal environment in 2024.
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By Proptechbuzz
By Ravi Kumar
