Global macroeconomic outlook 

Inflation outlook 

Inflation has surprised on the upside, so far this year. It’s expected to approach target rates by mid-year in developed markets (DM), though, with core services inflation remaining strong. Emerging markets (EM) are also experiencing disinflation, although risks like El Niño and geopolitical issues could affect food prices. We believe that US inflation will be harder to bring to target than in Europe and the UK, where disinflationary pressures are stronger.

Economic forecasts

The US is anticipated to achieve a ‘soft landing,’ avoiding recession while controlling inflation. However, factors that contributed to US exceptionalism are likely to diminish in 2024, leading to a slower growth rate. The US election poses uncertainties, with potential trade tariffs and fiscal policies influencing inflation and growth rates. Elsewhere, the UK and Eurozone should slowly emerge from recession-like conditions in 2024, helped by positive real wage growth. That said, Germany will continue to struggle from cyclical and structural headwinds to its growth model.

Global monetary policy

We expect major DM central banks to begin interest-rate cuts around the middle of this year. The European Central Bank (ECB) and the Bank of England (BoE) may each make an initial cut in June. Our assessment of the trajectory of equilibrium rates puts the eventual end point of cutting cycles at 2-3%. However, a “no-landing” in the US would involve activity growth remaining very robust, causing labour markets to tighten further and inflation pressures to mount. The US Federal Reserve (Fed) would not be able to cut interest rates this year and could even hike. This would also limit the space for other central banks to ease. We are watching consumer spending, jobs growth, wages, and inflation to tell us if this is playing out. Data over the past few weeks have certainly moved in this direction. The Bank of Japan (BoJ) will be a notable outlier. Admittedly, the data paints a mixed picture about the sustainability of Japan’s emergence from low inflation. However, a decent Shunto wage round should be enough for the BoJ to exit both negative interest rates and yield curve control this year.

Emerging markets and China

EMs have room for rate cuts given cooling inflation. Latin America is already easing monetary policy and Asia may follow later this year. China’s policy is easing, but real estate challenges persist and these are affecting GDP growth. We think India’s economy will slow in 2024, but continue to outperform its peers amid favourable structural tailwinds. A ramp-up in public infrastructure spending and a strong services sector should support growth in early 2024.

Scenarios

The US election is a source of significant uncertainty. Former president Donald Trump’s proposed 10% across-the-board tariff, and a 60% tariff on China, would hit global trade and sentiment. It would push-up US inflation and negatively affect growth. Potential fiscal easing could support growth, but also put upward pressure on interest rates.

In terms of other important macro scenarios, the probability of a ‘hard landing’ in the US is still high, especially as the tailwinds from elevated savings and strong supply-side growth fade.

Global economic forecasts

Source: abrdn April 2024 
Forecasts are a guide only and actual outcomes could be significantly different.

United Kingdom real estate market overview

The UK economy contracted over the second half of 2023, with GDP shrinking over the third (-0.1%) and fourth (-0.3%) quarters. Despite briefly entering a technical recession, the UK economy is expected to return to moderate growth over the course of 2024. Indeed, monthly GDP estimates for January were positive at 0.2%.

The annual consumer price index declined to 3.4% in February, down from 4% in January and a peak of 11.1% in October 2022. We expect headline inflation to fall well below 2% by the middle of the year, because of base effects and lower energy prices. 

At its March meeting, the BoE showed it’s more aligned in its direction to maintain monetary policy pressure than during previous months. The monetary policy committee voted 8-1 to keep borrowing costs at 5.25% and commented encouragingly on the positive direction of the UK economy.

The investment market remains subdued as investors are waiting for the rate-cutting cycle to begin. Quarterly investment volumes were down 34% year on year, according to Real Capital Analytics. These volumes could pick-up quite rapidly, though, when conditions are more favourable during the second half of this year.

Given the current environment, we expect to see investors largely remain on the sidelines for the first half of 2024. In the meantime, existing investor appetite will remain focused on high-quality assets that are benefiting from long-term thematic growth drivers. Any significant wave of distress is looking more unlikely. Occupational demand remains quite robust and strong rental growth has helped to anchor real estate yields.

Pricing should begin to look more attractive to investors in the second half of 2024. That said, monetary policy and a UK general election are still risks. We expect to see 100 basis points of rate cuts by the end of the year, encouraging investors to return to the market.

European real estate market overview

The Eurozone economy is showing signs of finding a floor and could see a gradual acceleration during 2024 and 2025. The Eurozone’s disinflationary process is well advanced but still has further to go. Forward-looking indicators of goods inflation suggest price growth in that component could slow even further.

However, the ‘last mile’ of inflation will be made more difficult by sticky services inflation. The ECB is gearing up for a cutting cycle. We therefore expect the first cut to come in June and for the ECB to lower rates four times this year.

European all-property values have fallen more than 19%, on average, since June 2022. We expect a further 4% decline over the next 12 months. Offices and secondary-quality assets face a deeper correction, as refinancing challenges persist, and as wide bid-offer spreads take time to narrow in the riskier parts of the market. Logistics and residential are expected to recover first.

Liquidity remains low in Europe. Investment in European real estate in the fourth quarter of 2023 was down 51%, compared with the long-term average. Investors are focusing on rebuilding balance sheets and reducing leverage.

Operational performance has been very positive. Prime rents have moved up in all sectors and vacancy rates are showing signs of stabilising or even falling in the case of retail warehousing. Occupier resilience is a differentiating factor for this cycle and low future supply underpins our outlook.

We expect a three-phase outlook. Firstly, we believe the yield revaluation is approaching its final adjustment. Secondly, we expect a recovery to materialise in the second half of 2024, with a gradual recovery in economic growth and falling interest rates. This is then followed by the final phase, which is a period of reasonable rental growth because of persistent low supply and weak construction activity.

We forecast an all-property total return of 1.5% in 2024, and 7.5% and 8.3% per annum (pa) on a three- and five-year annualised basis, respectively. While risks are elevated in the first half of 2024, attractive opportunities are emerging. For those with equity, opportunities to invest at attractive pricing points should emerge this year.

Asia-Pacific real estate overview 

We have raised our 2024 growth forecast for China, albeit marginally, but it remains short of the authorities’ 5% target. That said, we see upside risks to India’s growth despite a recent upgrade. In Japan, the BOJ has finally exited the era of ultra-easy policy and we expect further tightening to be limited. Rate cuts are unlikely to be imminent in Australia, despite the dovish shift in the Reserve Bank of Australia’s March statement.

Tokyo’s central business district (CBD) office market remains on track to bottom-out in the near term, despite a slight rebound in the vacancy rate during February. In Seoul, the vacancy rate for CBD offices is expected to rise from the current low of 2.4% by 2026, when more supply is added. The upcoming GTX-A rail line will enhance the location’s appeal. Offices in India’s Chennai area saw record high absorption in 2023. Entertainment and media companies, and banking, financial services and insurance firms are leasing more space.

A post-Covid rebound in occupier market performance has lifted investment demand for retail properties in Australia and Singapore. In Australia, over AUD850 million worth of shopping centres were sold to private investors in December alone. Stockland Balgowlah, a neighbourhood centre in Greater Sydney, was sold in March at close to its June 2023 valuation. Meanwhile, the Seletar Mall, a suburban mall in northeast Singapore, was reportedly transacted at a yield of just 3.9% in March.

We expect near-term capital returns in Asia-Pacific (APAC) to remain under pressure, despite the prospect of rate cuts in 2024. Over the longer term, our base case remains for interest rates to retreat to lower levels. We expect lower interest rates to support better capital returns beyond the immediate 12-24 months. Higher property yields in the near term are therefore likely to offer good opportunities for investors to pick-up grade-A assets in core locations.

US real estate market overview

The US economy looks likely to avoid recession. Activity has been remarkably resilient in the face of high-interest rates, helped by strong consumer and corporate balance sheets, positive supply shocks, and looser fiscal policy. The Fed played down recent inflation upsets at its March meeting, arguing that these bumps didn’t change the disinflation story. These signals leave the door open for a June cut.

Office leasing is still weak nationally and available space is rising across most markets. Multifamily rental growth should remain muted, given incoming supply that is concentrated around the Sunbelt. Industrial rental growth should normalise this year. Demand is expected be strongest in Shallow-bay industrial space, while big-box properties will struggle. The collapse of Baltimore Bridge may lead some occupiers to look for additional short-term space for safety stock, as lead times increase along the East Coast and Midwest. The impact on rental growth should be limited, though.

Prices have remained largely unchanged in March; commercial property prices are still sitting 22 % below their peak from a year ago. For the year ahead, industrial prices should remain quite stable. Price corrections should be more noticeable in the weaker Sunbelt multifamily markets. Office prices should be near stabilisation, although we still expect capital value declines of more than 7% this year. The bifurcation in performance between trophy or grade-A office assets and the rest of the pack will widen.

US total return forecasts have improved as the expected capital value correction plays through. We prefer smaller industrial spaces on the East, Gulf Coast, and the Midwest. The freight volume of ports servicing these regions remains healthy. Established East-Coast population hubs and Washington D.C. are our preference in the multifamily sector, given robust supply and demand dynamics. Views on strip retail remain positive because of a lack of new supply.

Global market summary – outlook for risk and performance

As we move further into 2024, we anticipate that the majority of the real estate pricing correction will have played out at an all-property level. However, expectations for capital values vary at a sector level. Assets in sectors that are unlikely to benefit from thematic tailwinds are particularly vulnerable. Poor-quality assets, where future retrofit costs are rising because of more onerous environmental legislation, are also unlikely to perform. We expect further capital decline for these types of assets.

Although we are more positive about the market’s prospects, the expected turning point has been delayed by sticky inflation and hesitancy to ease policy, particularly in the US. Investment activity remains subdued, but there are signs that sentiment is improving towards certain areas of the market. We expect activity and sentiment to improve as the year progresses.

We remain very positive about sectors with strong fundamentals, such as logistics, residential, retail warehouses, and some alternative sectors. Vacancies are low in these sectors as is future supply. Demand also remains strong and is benefiting from thematic tailwinds.

Global real estate outlook

We expect a three-phase outlook. Firstly, we believe the yield revaluation is approaching its final adjustment. Secondly, we expect a recovery to materialise in the second half of 2024, with a gradual recovery in economic growth and falling interest rates. This is then followed by the final phase, which is a period of reasonable rental growth because of persistent low supply and weak construction activity.

We forecast a global all-property total return of 1% over the year to March 2025, and 6% and 6.9% pa on a three- and five-year annualised basis, respectively. While risks are elevated in the first half of 2024, attractive opportunities are emerging. For those with equity, opportunities to invest at attractive pricing points should emerge this year. The UK, US, and parts of Europe are expected to lead the recovery. APAC is experiencing a more muted cycle, aside from the Chinese real estate crisis. Logistics, alternatives (other) and residential sectors are expected to outperform retail and offices, although retail warehouses and core CBD offices offer better performance within their sectors.

Global sector convictions

Source: abrdn. Non-risk-adjusted, local currency, absolute returns, excluding transaction fees. Arrows reflect recommended portfolio sector tilts for balanced funds, Q1 2024.

Past performance is not a guarantee of future returns.

Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed, and actual events or results may differ materially.

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