The global real estate market is poised for a promising 2025, UBS says in its latest global real estate report, driven by several macroeconomic factors including interest rate drops, decreasing vacancy rates and a more robust supply-demand balance.
Primarily, the financial analyst says, falling interest rates are expected to lower financing costs, making real estate investments more attractive.
“This environment should encourage increased transaction volumes and capital deployment, with over US$400 billion in private capital ready to be invested,” UBS noted.
“The supply-demand balance is improving. Constrained new supply, due to regulatory and cost challenges, should contend with robust demand, particularly in AI-linked sectors including logistics and data centres, as well as multifamily housing.
“This dynamic is likely to lead to decreasing vacancy rates and rising rental growth, driving capital appreciation over the next several years.”
Private real estate to shine
Lower interest rates will be the dominant effect to a brightened outlook for investors into real estate and private managers should see an uptick in rental growth in the logistics and a pipeline of new developments, writes UBS.
“While some investors may be reluctant to put money to work in private real estate after valuation declines, limitations on redemptions, and concerns about corners of the market (like older US office assets), we believe a brightening outlook warrants investors’ reconsideration.
“First, we believe the asset class will benefit from the relief of lower interest rates. This shift is expected to boost transaction volumes, as private funds put undeployed funds to work. According to CBRE, average US capitalisation rates held steady at 7% in the first half of 2024, and we expect this favourable yield environment relative to bonds to persist into 2025.
“Second, private real estate managers focused on the highest quality assets may be well placed to exploit sectoral divergence.
“Data centres, another area of private manager focus, offer attractive return prospects amid the AI capex cycle, in our view.”