After bouncing back from the pandemic in 2021, global real estate will likely have another strong year in 2022 – we expect returns of 8%. Despite disruptions in product and labour markets and isolated covid outbreaks, economic activity and employment growth will continue at pace, driving global real estate returns.
The long-run shift to online sales and a still-high share of spending on goods mean that the industrial sector – particularly distribution, warehousing, and urban logistics – should continue to offer superior returns. We expect 2022 returns to cool relative to 2021, but the sector is still likely to see the second- highest annual return on record at 14.2%.
The residential sector and, to a lesser extent, the office sector should benefit from easing Covid restrictions, returning 8.6% and 6.6% respectively. Office returns will be the best since 2019 at 6.6%, driven by modern space that meets corporate ESG requirements with configurations amenable to hybrid working. Returns in high contact sectors will continue to lag the recovery, with retail (5.9%) and hotels and leisure (5.2%) seeing muted growth.
In the medium term, secular forces such as demographics and corporate saving combined with modest rises in interest rates will weigh on returns. By 2026 we expect returns to temper considerably, falling well below their historical trend.
THE ANALYSIS
With an overall improving health situation globally and tentative signs that supply constraints may be abating, we expect growth to strengthen from here even if it doesn’t hit the heights of H2 2020. A continued relaxation of restrictions globally is crucial to the ongoing recovery as it allows spending to be diverted toward services and away from durable goods. This should help to alleviate much of the pressure on global supply chains. But it is also crucial to broadening out the recovery in real estate returns to sectors beyond industrials.
Industrial properties lead the way: Global industrial real estate returns are set to lead the recovery in 2022 at just over 14%, particularly as distribution centres and urban
logistics will benefit and manufacturing more generally should expand rapidly to keep up with demand.
Residential demand will sustain: Global investor demand for residential properties in 2022 is expected to sustain yield compression, generating another strong year for returns. The defensive characteristics of the residential sector, combined with the long-term demand drivers of urbanisation, smaller households, and affordability constraints on home ownership will continue to attract capital. We estimate global residential returns of 8.6% in 2022, similar to 2021 and the highest since 2015.
Office and retail returns to improve: Office and retail returns have suffered much more than industrial and residential in the pandemic, but looking ahead we expect the gap to start narrowing. Returns of 6.6% and 5.9% in 2022 respectively, while still lagging, will represent a big improvement on 2020 and 2021 (particularly for retail).
Looking further ahead there is a clear distinction to be made between the two sectors. Office returns are set to weaken in the medium term as interest rates rise and as sustainability and hybrid working polarise the market. However, we continue to believe that cities will remain very much ‘alive’.
We expect modest strengthening in retail returns over the next five years. We believe that the long-run shift to online retail will endure, but equally the correction in the retail sector combined with the boom in industrial and residential has generated more repurposing opportunities. While the resilient performance of retail parks and supermarkets during the pandemic has lifted demand for these assets. We expect returns to average 6% over the next 5 years, well below the pre-pandemic average of over 8%.
Hospitality will make up lost ground: The hotel and leisure sector returns have clearly been most damaged by the pandemic, falling more than 5% in 2020 alone. We expect the sector to continue to make up ground in 2022, but with business travel lagging the recovery, the 5.2% returns we expect this year are still below the prepandemic average. While 2023 will see the peak in post pandemic returns, the medium-term outlook remains subdued.
THE UNEVEN NATURE OF THE GLOBAL ECONOMIC RECOVERY WILL ALSO PLAY OUT IN REAL ESTATE MARKETS. WE EXPECT NORTH AMERICAN PROPERTY TO RETURN MORE THAN 9% IN 2022, WHILE RETURNS IN ASIA WILL BE AT 6.9%.
