Although higher inflation and bond yields provide a challenging backdrop for the sector in 2024, Savills IM believes that real estate will continue to provide highly attractive value-creation opportunities for investors through compelling yields, capital protection or capital growth. 

Savills IM identifies the threats to the near-term macro picture, the most notable being a cautious approach from central banks to inflation. While interest rates may have peaked, it is likely they will remain higher for longer with no respite until late 2024. On this basis, Savills IM believes it is important to focus on fundamentals when identifying opportunities within real estate.

According to Savills IM, the road to net zero and sustainability efforts also remain at the forefront for investors, and measures to reduce buildings’ operational costs and protect against obsolescence due to regulatory demands continue to be imperative.

Is now the time for real estate debt?

In terms of strategies, Savills IM believes that now is the time for real estate investors to consider allocations to real estate debt, a sector which is experiencing several supportive trends creating compelling opportunities. Declining availability of debt financing, real estate yield rerating and rising interest rates have created favourable return conditions for those able to lend. The downside protection from equity cushions provided by real estate debt is highly attractive to those investors looking for stable and secured income against a backdrop of market volatility and future uncertainty.  

Opportunities in affordable housing for institutional investors

Elsewhere, affordable housing continues to be driven by fundamental supply-demand imbalances across all European markets. Rent affordability is consequently an issue for residents, policymakers, and investors alike. In the year to 30 September 2023, average rent levels rose by 8.2% across Europe (ex-UK) and by 10% in the UK. Against this backdrop, institutional investors have an opportunity to be part of the delivery of new supply in the long term, and in the short term should ensure they are not overly reliant on market-rental growth, instead focusing on affordability and minimising cost leakage. Prioritising residents will ensure longer tenancies, larger community benefits, and ultimately more stable income for investors.

Strong rental growth in urban industrial & logistics

Rents for modern urban industrial and logistics buildings are set to grow strongly over 2024, particularly for those units within or close to the major urban areas. Across the logistics sector, growth has transitioned from being driven by cap rate tightening to rental growth. Low vacancies and poor-quality existing stock are factors exacerbated in urban areas, where proximity to the end customer is increasingly critical and where suitable stock and land supply is typically falling. Investors could seek to invest in modern, income-producing assets or take the opportunity to create best-in-class, ESG-approved, industrial and logistics space.   

Alex Jeffrey, Chief Executive, Savills Investment Management, commented: “2024 will likely prove to be another challenging year for real estate investors. However, periods of high market stress will present opportunities to those investors with the requisite market knowledge. We see allocators tilting towards Living, Industrial & Logistics, Debt and, in increasingly, Natural Capital orientated strategies,”

Andrew Allen, Global Head of Research, Product Strategy and Development, Savills Investment Management, added: “Urban industrial & logistics continues to be driven by strong fundamental factors and demand for modern, ESG compliant best-in-class assets create opportunities for investors. Elsewhere in the affordable housing sector, the role of private capital continues to grow in importance as part of the solution to ensuring the continued availability of homes for residents across Europe. Debt markets keep providing attractive risk-adjusted returns with strong downside protection. Against a backdrop of heightened cyclical market uncertainty, the stable income provided by senior real estate lending will remain highly attractive to institutional investors.”

Piotr Trzciński, Head of Poland, Savills Investment Management, said: “In response to heightened uncertainty, we've revised our strategy for Poland in 2023. Looking ahead, we anticipate the Polish market offering appealing investment prospects within the next year. However, we foresee these opportunities emerging no earlier than the latter half of 2024, once we gain more clarity on factors such as interest rates, financing costs, valuations, the release of National Recovery Plan funds for Poland, and the sustainability of tenant demand. Our market is still in the process of price discovery, and we estimate it will likely take until at least 2025 for the Polish market to regain its previous transaction volumes. Despite this, with our existing portfolio valued at €1.8 billion, we continue to regard Poland as a significant market, though an opportunistic one compared to Western Europe. We are particularly drawn to the long-term potential of the urban logistics and living sectors in Poland due to their favourable underlying fundamentals.”