by Bill Page and Miriam Uebel
Global real estate remains in somewhat of a ‘holding pattern’. Medium-term expectations look reasonable on the back of historic repricing. However, investment volumes and fund flows remain disappointing – what do the next 12 months have in store?
Over the long term we expect specific real estate sectors to be beneficiaries of structural change.
We believe those constructing a portfolio from scratch will be well placed in allocating to the living sector and the segments within that will benefit most from population growth, population flows and changes to age cohorts. Meanwhile, industrial segments which can provide more efficient and sustainable distribution look set to command a greater share of available demand.
However, lower yields in such sectors - and higher yields in what were more structurally challenged sectors like retail and offices - have narrowed the gap in expected returns over shorter horizons. With some exceptions, the benefit of sector-level allocation is likely to be smaller over the next few years, while, in our view, the benefits accruing to investors of asset selection, asset operation, and location selection look set to be enhanced.
We see real estate as one of the asset classes best positioned tactically within private markets. In our view, yields offer investors fair value.
In Europe, despite country-level variation, Eurozone yields have been more stable, but their low levels still support a reasonable risk premium to real estate. This provides comfort in today’s valuations, but in the context that there is more than one scenario which could move risk-free rates and property yields over the medium term. We believe the most likely scenario is a continuation of recent history – a risk-free rate than remains stubbornly higher than expected at the start of this new cycle, albeit with some short-term noise.
Real estate yields are, therefore, expected to remain relatively stable over the next few years compared to recent history, with a positive but narrow risk premium. The UK and the US are expected to outperform Europe and Asia Pacific, although we would emphasise the lower risk-free rate relative to expected returns in Europe and how its average expected return obscures significant geographic differences.
We recognise that, to encourage more life into investment volumes and fund flows, these average expected returns would benefit from being higher. But there are also some upsides.
Performance is likely to be driven by rental growth. Global property markets are expected to deliver performance that is positive in real terms. This may be enhanced further by continued frictions in the ability of the industry to deliver new buildings. We’ve seen this across all global sectors, but has arguably been more acute in UK living, given additional planning frictions, and in prime city centre offices given a reluctance to commit to development while post-COVID occupier preferences were still evolving. We therefore see upside risks to rent forecasts, but these upsides are still likely to be geographically specific.
Meanwhile, leverage is becoming more accretive globally, especially in many European cities. In an evolving real estate market where contractual leases are increasingly considered alongside operational exposures, we also think investors who align with their operators to deliver successful buildings will be well placed to deliver attractive risk-adjusted returns.
We therefore think the 2026 outlook to be one of misleading averages – where narrowing performance differentials between broad sectors at a high level obscure significant opportunities for outperformance at the segment, location and strategic level.
Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts will come to pass.
Disclaimer: Views in this blog do not promote, and are not directly connected to any L&G product or service. Views are from a range of L&G investment professionals, may be specific to an author’s particular investment region or desk, and do not necessarily reflect the views of L&G. For investment professionals only.
More about Bill Page, Head of Real Estate Research, Private Markets, Asset Management, L&G
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