The world's biggest election year
Similar to during the Euro crisis and Brexit, political influence could resurface as a wildcard. Real estate companies tend to be local which means investors need to be aware of volatility stemming from political influence. More than 70 countries will hold nationwide elections in 2024, including seven of the 10 most populous countries in the world accounting for 50% of the world's population. Political influence in global real estate is broad, varied and depends on the sub-sector, i.e. commercial vs. residential. Political influence contributes differently to the various sub-sectors, even within the same country, for example the impact to offices is based on employment (hence possibly on “ease of doing business”) or retail on consumption (hence possibly on income redistribution). As many real estate companies are local and given the pipeline of upcoming elections, real estate could be subject to political influence in 2024 to a greater extent than usual.
Sustainability and ESG compliance
Regulation, obsolescence risk and sustainability are only likely to grow in importance going forward. While higher cost of capital led landlords to prioritise capital preservation, we believe looming regulation will likely bring back green capex to the forefront of capital allocation. For example, as part of the EU’s Energy Performance of Buildings Directive (EU EPBD), all commercial buildings in the EU will require a minimum Energy Performance Certificate (EPC) rating of E by 2027 and D by 2030, driving office refurbishments to increase. We can see this in Paris’s Ile-de-France where 40 to 48% of offices are set to be refurbished between 2023-2027. And yet, globally, the challenge remains immense.
AI in real estate: evolution and revolution
AI and generative AI were ranked among the top three technologies that were expected to have the greatest impact on real estate over the next three years by investors, developers and corporate occupiers. For real estate, the long-term impact from AI could be profound given its power to transform how people live, work and play. Shorter-term, AI is both a tenant/customer -- for some real estate sub-sectors, such as data centres -- and supplier, for potentially all. AI is being adopted across real estate functions, from investment management, design and construction, building and facility operations to portfolio management. Among "AI's landlords", data centre owners continue to be recommended by UBS analysts globally: in the US, our analysts note in their previous work on the top themes for communications infrastructure in 2024, that "the addition of generative AI to the demand funnel, coupled with ongoing power constraints in key markets, has swung the supply/demand pendulum more in favour of the operators" hence "expect this to support continued pricing improvements in 2024".
Macro Environment
With lower rates and moderate inflation, could this be the perfect macro environment for global real estate? Our data shows Real Estate Investment Trusts (REITs) typically rally into rate cuts, but this is a short-term boost, which has already happened going into 2024. More fundamentally, the lower rates are accompanied with weaker economic growth, a headwind for real estate. Our US REIT analysts flag in their 2024 outlook the softer macroeconomic backdrop as likely to pressure US REIT fundamentals and earnings growth. In parallel, inflation is slowing, a positive for real estate. Our data supports the conventional wisdom that real estate performs well in a moderate inflationary environment, i.e. the one forecast for 2024.
