Since the COVID-19 outbreak four years ago, the property market, a long-standing favorite among affluent investors, has experienced significant turbulence. Notably, the office sector has taken a considerable hit. With the persistent trend of remote working and a challenging economic environment characterised by rising interest rates, office buildings, especially in major cities, have seen their valuations plummet. According to Green Street, a leading real estate research group, office valuations in European cities like London, Brussels, and Zurich have dropped by over 30% since the end of 2019.
The United States has faced similar challenges, with vacancy rates reaching generational highs. In tech-heavy San Francisco, office visits have halved, influenced by the tech industry’s flexible work policies. Even in New York, where financial giants have pushed for a return to office life, visits are still down by 17%.
Silver Linings in Commercial and Residential Sectors
Despite the grim outlook in the office market, other areas of the commercial real estate sector have shown resilience. The U.S. retail property market, for instance, has benefitted from a scarcity of available spaces. Advancements in footfall tracking technology have allowed businesses to select prime locations, revitalising interest in top retail sites and malls as COVID-19 concerns wane.
The industrial sector, encompassing warehouses, has enjoyed a positive trajectory. Fueled by the e-commerce boom during the pandemic, demand for storage space surged, with giants like Amazon expanding their physical footprint. Although the sector felt the pinch from rising interest rates mid-2022, signs of recovery are evident, particularly in major hubs like London.
The residential market is also bouncing back. In the U.S., house prices have returned to peak levels, driven by a shortage of housing inventory and homeowners holding onto low mortgage rates from before the rate hikes. According to Liam Bailey from Knight Frank, this shortage has reduced the property stock available for sale by about 30% compared to usual levels, helping to buoy prices.
Bright Spots and Cautious Optimism
Real estate investment trusts (REITs), popular among wealthy investors for their liquidity, have shown periods of outperformance against the broader stock market in the U.S. Although private real estate funds have had mixed results, they are poised for potential gains.
However, the broader health of the property market remains at the mercy of central banks, particularly the U.S. Federal Reserve. With interest rates expected to stay at record highs of between 5.25% and 5.5% for an extended period, some investors might hesitate on large acquisitions. Yet, the anticipated direction of rates is downward, fostering confidence among investors that inflation will be managed, leading to a stable economic environment.
Long-term Outlook
The high street’s outlook has improved significantly compared to a year or eighteen months ago, crucial for driving demand across office, industrial, and residential sectors. This optimism underpins the belief that property valuations will climb over the next five years, propelled by lower interest rates and persistent supply shortages.
Despite challenges such as the pandemic, geopolitical tensions, and rising interest rates, the long-term allure of real estate investment remains strong. Historical trends suggest a robust upward trajectory in property values, making real estate an enduringly attractive asset class for both ultra-wealthy individuals and institutional investors.