The current global real estate cycle counts among the longest in recent history, notably in the United States, which has now recorded almost a decade of uninterrupted capital value growth. There is a sense of caution among investors and lenders, linked to concerns about elevated real estate pricing, a perceived lack of available stock, and heightened political uncertainty. Transaction volume is stable rather than accelerating, while use of leverage is lower than might be expected late in a cycle. 2019 is set to be a year in which investors increasingly face challenges – from slowing returns, stock availability, an evolving policy environment, and shifting occupier and investment market dynamics.
PGIM Real Estate expects the nine global real estate trends below to shape the next 12 months.
1. Tighter Monetary Policy Environment
History suggests that monetary policy tightening will eventually be followed by slowing returns on real estate, although accommodative fiscal policy should help offset its impact.
2. Occupier Markets Holding Up
Resilient global growth continues to support most occupier markets – office and logistics are recording strong demand and falling vacancy, but retail is struggling.
3. Supply Growth Threatened by Rising Construction Costs
Capacity constraints and rising costs in the construction sector are dampening the supply pipeline and point to upside risks to the rental growth outlook.
4. The Rise of Flexible Offices
Flexible offices are a fast-growing and increasingly prominent part of the office market, with the largest scale in major global gateway cities.
5. Yield Compression Slows Further
Rising interest rates and upward pressure on the risk premium from policy uncertainty means yield compression is set to slow further.
6. Transaction Volume Still Tracking Sideways
Transaction volume is stable, although a recent increase in the average size of new funds points to a growing share of portfolio deals in 2019.
7. Retail Value Correction
The prospect of value write-downs implied by retail REIT pricing suggests retail is going to remain out of favor in 2019.
8. More Operational Risk
Low core returns and a rising share of value-add capital raising points towards further investment in operating assets that offer an additional risk premium.
9. Lender Discipline Persists
A degree of caution persists among lenders, keeping loan-to-value (LTV) ratios down and creating an opportunity for a growing private debt fund sector.
The full PGIM Real Estate Trends for 2019 Outlook is available for financial professionals.
Investing in real estate poses certain risks related to overall and specific economic conditions, as well as risks related to individual property, credit, and interest rate fluctuations. REITs may not be suitable for all investors. There is no guarantee a REIT will pay distributions given the inherent risks associated with the market. A REIT may fail to qualify as a REIT as defined in the tax code, which could affect operations and negatively impact the ability to make distributions. There is no guarantee a REIT’s investment objectives will be achieved. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee that the expectations will occur.
The views expressed herein are those of PGIM Real Estate investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither Prudential Financial, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
1016387-00001-00 Ed. 1/2019