Real Estate Outlook: Three takeaways for private investors
Amid evidence of a recovery progressing across global real estate, we explore the key opportunities for private wealth investors in 2025 and beyond.
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Schroders Capital’s real estate team recently published its H1 2025 investment outlook, looking at the strategies playing to the most impactful macro themes and how investors should position their portfolios for the medium to long term. In this article, we examine the key opportunities across the asset class for wealth managers and private investors, highlighting the role private real estate can play in strategic asset allocation.
The current economic climate presents a complex, but navigable, landscape for real estate investing. Reinflationary policies, geopolitical tensions, wage pressures, and increasing government spending and debt, are likely to slow the pace of interest rate cuts and pose significant challenges for economic growth.
Despite these headwinds, our proprietary valuation framework continues to identify notable live opportunities across key real estate sectors and geographies, following the recent market correction and supported by favourable supply and demand dynamics. We believe this signals a steady recovery for global real estate – and that 2025 and 2026 will provide a strong vintage for real estate deployment, with potential for outperformance over the long term.
We have shifted to a neutral portfolio stance across sectors, believing that asset and location considerations will have a greater influence on performance going forward; selectivity will be key. That being said, we do maintain a strong conviction on the industrial and logistics sector, especially in Northern Europe, as well as on ‘living’ and ‘operational’ segments such as certain parts of residential housing, self-storage and hotels, which can be a source of resilient, inflation-tracking cashflows.
Our three key takeaways from the H1 2025 outlook are:
1. A steady real estate market recovery is in progress
Global growth is set to remain at 2.5-3% over 2025/26, while above-target inflation is set to persist and interest rate normalisation is likely to slow. This is all priced into our views, with the greatest risk to baseline forecasts being an ‘aggressive’ Trump scenario that could weaken the US growth outlook and be deflationary for the rest of the world.
In this environment, diversification is key – and this supports the consideration of private real estate given its historically low correlation with liquid asset classes (see chart below - numbers closer to 1 indicate higher correlation of returns).
Correlation between private real estate and other asset classes
Furthermore, and supporting this view, we believe the real estate market is in the early stages of a steady recovery. Key reasons for this include:
1. Transaction prices finding a floor. There is increasing evidence that real estate transaction prices are recovering following steep declines experienced since the middle of 2022.
Transaction prices recovering following significant falls across multiple sectors
2. Improving investor sentiment: Transaction volumes picked up at the end of 2024 – and there are signs of improving investor sentiment that should lead to higher investment volumes.
Global real estate investment volumes remain subdued, but signs of recovery emerge
3. Tight supply and scarcity of sustainability-certified spaces: The limited supply of real estate, exacerbated by high construction costs, means vacancy rates are low (see chart below). This supports rental income levels and could drive rental growth, especially as economic conditions improve.
Real estate vacancy rates remain low
4. Potential cost-push impact on rents: With construction costs already high, there is potential for a 'cost-push' effect on rents if large-scale rebuilding programmes are launched, assuming a cessation of conflicts around the world.
2. We have shifted to a more neutral preferred portfolio positioning across sectors.
Our portfolio positioning is evolving towards a more neutral stance across sectors. This shift is partly driven by a clearer understanding of minimum rental income levels ('rental floors') in the retail and office markets. Meanwhile, we see value in ‘future-proofed’ assets that demonstrate resilience and adaptability in the face of changing market conditions, owing to prevailing elevated yields.
More broadly, asset and location considerations, such as sustainability profiles, will become increasingly important for investment success compared to recent years, during which performance varied widely across sectors.
However, we do retain strong conviction on the industrial and logistics sectors due to strong fundamentals and supportive mega-trends, including an ongoing shift to near-sourcing and e-commerce, which are supporting yields (see chart). We also maintain high conviction on a range of living and operational segments able to provide ‘inflation pass-through’ directly or indirectly, with many also being well-supported by favourable structural trends.
Debt financing currently accretive to paid income returns in European light industrial strategies
We also see opportunities in upgrading buildings to modern, sustainability standards due to constrained development pipelines, limited debt capital availability, regulatory pressures, and shifting occupier preferences.
3. Key structural trends are translating into sequential investment opportunities for portfolio diversification and enhanced returns
The Covid-19 pandemic transformed our engagement with real estate, boosting demand in some sectors, while diminishing it in others. Then from mid-2022, real estate markets, like the broader economy, faced challenges from rising interest rates, which had huge impacts on the cost and availability of financing and decimated transaction activity.
There were, however, big differences in the speed and scale of repricing in response to these combined challenges, while evolving trends bring focus to different real estate segments, with the potential to create clear winners and losers. The result is a set of ordered investment opportunities for those fund managers who can recognise and act on strategies in this repriced environment.
We have identified four secular trends that private investors can tap into, which play to key mega-themes and are characterised by favourable supply and demand balance, with potential to generate higher long-term returns:
- Technology & the knowledge economy. New ways of working have consolidated value in buildings that address specific needs and evolving tenant preferences within sectors such as office (select areas), life sciences, and R&D.
- Individualism and deglobalisation. Individual preferences regarding the way they "work, live, and play" have deepened disparities in demand between and within related sectors like hospitality, micro-living, urban logistics, and self-storage.
- Demographic shifts. The ageing population further influences the relative demand for various types of affordable living formats, including multifamily and single-family rental, student housing, and senior housing/care.
- People, places, planet. Increased regulatory and industry standards necessitate a holistic approach to creating value for all stakeholders, including investors and communities. This trend is evident in sectors focused on energy and amenity upgrades, regeneration, social housing, and medical office spaces.
Each of these subsectors has attracted substantial investor interest due to potential diversification and enhanced income return benefits relative to more mainstream residential formats. However, they also require a different set of investment considerations and the development of specialist management expertise.
How can private investors access real estate today?
Today, multiple structures, including open-ended evergreen funds, make private assets more accessible to individual investors. Combined with the current opportunity we see in the asset class, this offers private investors an exciting entry point to access the potential benefits of real estate as a source of attractive, long-term and income-based returns.
As with all private investments, performance is subject to investor expertise. We believe manager proximity to the underlying assets, both geographically and operationally, is vital. And of course, for all individual investors seeking to access commercial real estate, the liquidity profile and governance provisions of the growing number of investment solutions available must be factored into portfolio construction.
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