We all know the financial markets hate uncertainty. First there was Brexit, then an election, then the Russian invasion of Ukraine, then the Israel/Hamas war. Just as we think that one unsettling event is coming to an end, another one starts and when we begin to get to grips with that, then there's Trump.
The real estate market is no different. On top of which, we have higher interest rates than we're used to and inflation is still higher than expected. With all this going on, it's understandable that investors or businesses hesitate when making their next move, but perhaps it's time to stop finding a reason not to.
According to Savills World Research, global real estate value, combining commercial, residential and agricultural land, is estimated to be worth $380 trillion; compared to gold $12.2 trillion, equities $98.9 trillion and debt securities $129.8 trillion. Real estate is still out in front as the most valuable asset. Is this surprising? Well, when you think about it, no. It's 'real', it's immovable and creates safety as a result. For commercial property owners, their real estate assets create long term income.
Global real estate investment has decreased from 2021-2023 but recovered slightly in 2024 and the trend is expected to continue this year. Capital values for real estate are also rising, driven by rental values, with the latest indication showing that capital values rose by 0.3% in May. Rental values also rose by 0.3% in May, while total returns for the month were 0.7% according to CBRE.
While certain sectors are seeing increased investment, office investment continues to decrease. The effect of Covid is still being felt as businesses continue to manage hybrid working with their office use and many office buildings are now being repurposed for residential, retail or hotel use, which is becoming an increasingly attractive investment. In Edinburgh, almost all repurposed office buildings are being converted to hotel use.
Real estate could be considered land disguised as buildings, with the potential for redevelopment still to be unlocked. The constant demand for new residential properties continues to put pressure on developers, but repurposing existing buildings could achieve this quicker.
Of course, there are negatives to owning real estate, potential running and repair costs need to be taken into account, there is also the risk of destruction or becoming a stranded asset. ESG strategies must now be taken into consideration and being able to pass those costs onto tenants will be hard to do. Market reports, however, indicate that properties with strong ESG credentials are now achieving higher rental values and lower vacancy rates.
We are on the road to recovery and it may be a rocky road, but the positives of a well-managed asset must surely outweigh the negatives. It might be hard work, but the rewards could be well worth it.
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