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Drivers of 2015 real estate returns

Mike Keogh

Michael Keogh, Associate Director of Research & Strategy, discusses the drivers of long-term real estate growth.

According to the August 2014 Preqin Investor Interview survey, 93% of respondents wanted to increase (41%) or maintain (52%) their allocation to global real estate in the long-term. This trend has been reflected in strong global real estate investment activity to date, which remains on large, well ahead of any broad improvement in leasing activity. This reflects certain major macro-economic and geo-political headwinds. A recovery in credit conditions, attractive financing costs, and the prospect of low growth and inflation, has led to an investor preference for core, more liquid real estate markets, which are recording economic growth and are supported by good property fundamentals. This trend is unsurprising: not only does Preqin report that the economic environment is the overwhelming key issue that will influence future allocations, but that we are also poised to move from a yield to rental-driven performance in 2015.

With that in mind, the prospect of divergent Central Bank action will be a key determinant in capital flows, transactional volumes and pricing in 2015. UK and US policy makers are likely to move well-ahead of both the ECB and Japan, with employment and growth becoming more resilient. However, this will not necessarily mean an associated softening in real estate pricing. At this stage in the cycle, with only the prospect of very modest, well-documented changes in borrowing rates for the US and UK, it is likely that only a crisis in occupier markets would undermine valuations. This is reflected in those markets with prospects of interest rate rises; rental growth should also materialise given stronger growth, supporting market returns.

Drivers of 2015 real estate returns 
Source: Preqin Investor Interviews, August 2014

 

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Michael Keogh

Mike Keogh

Director of Research

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