The case for real estate in a changed market

Commercially Minded | The case for real estate in a changed market 

In this month’s episode I am joined by Shabab Qadar, Head of London Offices Research, and Katie O'Neill, Head of European Living Sectors Research, to discuss the case for real estate, re-examine the arguments for the asset class, and ask whether a new investment case is beginning to emerge.

Shifting from income to total return

The textbook case for real estate, steady income, diversification, inflation protection and the tangibility of a real asset, has not disappeared, but the weights of those attributes have shifted. With interest rates no longer materially below income yields, real estate has become a total return play, rewarding operators who can genuinely add value at the asset level.

Rental growth as the new anchor

With gilt yields hovering above 5%, the headline comparison looks unflattering. But the counter argument is that gilt income is fixed, while real estate offers the prospect of income growth. In London offices, development activity is not keeping pace with occupier demand for the type of space now required, a dynamic driven partly by viability pressures and partly by the same macroeconomic caution weighing on investors. The result is a market where supply constraint is doing much of the work in underpinning rental value growth, and where that growth is, to a degree, baked in. In the living sectors, the picture is more nuanced. UK rental growth is no longer the near certainty it was five or six years ago, but micro market selection, the right stock, the right location, and crucially the right operator, is still delivering. 

Operational excellence as the new alpha

Structural themes such as demographics, urbanisation, decarbonisation and data infrastructure are now broadly understood by investors. What is less widely appreciated is the role of operational excellence. In the living sectors, on site operators managing occupancy, pricing and competitive positioning are shifting returns in a way that passive ownership cannot. In London offices, decarbonisation is increasingly touching every element of real estate, from capital flows and lease structures to construction and valuation, with sustainable buildings commanding measurable rental and value uplifts. 

A broader lens on the UK case

The familiar arguments for the UK, rule of law, language, time zone, liquidity, remain valid, but may no longer be sufficient on their own. Looking ahead, the conversation points to the UK's concentration of creative and knowledge based sectors, its emergence as a European hub for AI, and the growing weight of defence and infrastructure spending as reasons to revisit the thesis. Lower interest rates in parts of Asia Pacific are also supporting a fresh wave of overseas capital, particularly from Japan.

Listen to the latest episode of Commercially Minded for an informed perspective on where the case for real estate now stands, and what investors may be missing. Follow the podcast for monthly insights here and subscribe to Will's newsletter for a weekly take on the commercial real estate markets.