Global economic outlook

The global economy is slowing, yet a soft landing remains the base-case scenario for the US. Most regions should also experience tapering growth and a gradual recovery. Easing inflation pressures and varying policy responses across different regions are shaping the economic landscape.

In the US, the economy is expected to decelerate further, with growth projected to fall below 2% annualised in the second half of 2024. Despite the slowdown, strong consumer and corporate balance sheets –coupled with easing price pressures – are expected to support a soft landing. The Federal Reserve (Fed) has initiated a robust easing cycle, cutting rates by 50 basis points (bps) in September 2024 and signalling further reductions by the end of the year. This proactive stance aims to balance inflation risks and labour market concerns.

Economic growth across Europe has shown resilience, despite geopolitical and fiscal challenges. The UK recorded a robust 0.5% of growth during the second quarter of 2024, while the broader Eurozone experienced mixed performance. Southern European economies displayed solid growth; whereas Germany and France faced stagnation, as manufacturing and industrial production suffered from cyclical and structural weakness. Consumers remain the most robust part of the economy, with real wage growth holding up well and employment rates proving resilient. With inflation dropping below target, the European Central Bank has adopted an easing policy, lowering its deposit rate by two further 0.25 percentage point cuts in September and October, with further cuts anticipated. The political landscape, particularly the ongoing tensions with Russia, continues to weigh on the economic backdrop for the region.

In the Asia-Pacific region, the economic outlook is diverse. Japan is gradually normalising its monetary policy, influenced by rising wages and solid corporate profitability. Wage growth negotiations by various unions are looking to push for a 5% increase in the most recent round of discussions. The country’s gross domestic product is expected to grow at a moderate pace, supported by strong export performance and domestic consumption. Meanwhile, China’s aggressive policy easing measures in September aimed to counter tepid economic performance, although their long-term effectiveness remains uncertain. The Chinese government’s focus on stabilising the property market and boosting infrastructure investment is expected to drive growth, and we expect further stimulus measures to come through this year. The Reserve Bank of Australia is expected to begin rate cuts in early 2025, responding to a gradually cooling labour market. Australia’s economy is projected to slow down, with a focus on transitioning towards a more sustainable growth model.

Scenarios
With uncertainty still relatively high, owing to the US election and rolling geopolitical tensions, we are using scenarios and probabilities as the best way to plot the course of the global economy. The six scenarios below summarise the potential outcomes and their probabilities, as of September 2024. 

Soft landing (30%): US growth moderates but remains positive, while Europe and China recover supported by policy easing. Inflation returns to target, allowing central banks to lower interest rates further.

No landing (20%): Robust activity growth causes tight labour markets and inflation pressures. The Fed doesn’t cut interest rates in 2024 and may hike again.

Inflationary Trump (15%): A second Trump presidency leads to trade wars, immigration restrictions, tax cuts, and deregulation, causing a significant inflationary shock.

Rolling end cycle (15%): Earlier interest rate hikes lead to a US recession. The Eurozone and UK dip back into recession, and Chinese activity slows.

Supply side uplift (10%): Robust supply growth leads to strong global growth without exacerbating inflation. Central banks ease rates, but higher potential growth means a higher equilibrium interest rate.

Oil and shipping price surge (10%): Middle-East conflict causes a surge in oil prices and global supply chain disruptions, leading to higher inflation and potential central bank tightening.

Global economic forecasts

 

 

Source: abrdn October 2024
Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed, and actual events or results may differ materially.

European real estate market overview

In June 2024, abrdn’s multi-asset houseview upgraded global listed real estate to overweight. In September, global direct real estate received the same upgrade. This marks the first overweight rating for this asset class since June 2022, indicating a recovery phase in its typical five-to-seven-year cycle. Despite an October market cooldown, our June call was well-timed, with Eurozone real estate investment trusts (REITs) rising 10.2% in the third quarter, while the Euro Stoxx 600 Index remained flat.

We anticipate direct real estate performance improving in the coming quarters, with evidence of this already. INREV reported a 1.2% return for European assets in the second quarter of 2024, driven by capital growth – the highest in seven quarters. The Netherlands, Spain, and Italy excelled, while Ireland, Germany, and the Nordics underperformed.

For European real estate, our conviction on the turning point is high. This is for three key reasons. 

Despite pockets of distress, the broader debt funding gap feels distant. In July 2023, European REITs faced a €35 billion gap because of limited credit for maturing debt. Bond markets were essentially closed for unsecured loans, and bank debt was also scarce on affordable terms.

A year later, things have shifted dramatically. By September 2024, Green Street estimated the gap had shrunk to €12 billion. This significant drop resulted from disposals, debt repayments, refinancing, and fresh equity raises. Finance costs fell, loan-to-value ratios stabilised, and interest cover ratios improved. While this data focuses on REITs, we believe it reflects most capital pools. Distress now mainly affects poor-quality offices, over-leveraged developers, and parts of the German real estate market. 

Since REITs are an early sign of direct real estate performance, their recent shift in strategy indicates the market's recovery. In the Eurozone, REIT share prices have risen by 30% over the past year and by 12% over the past six months. Most have transitioned from balance-sheet rebuilding to external expansion. They secured €7 billion in unsecured loans during the third quarter, along with additional fresh equity from rights issues. Many are now trading nearer to net-asset value, while seizing growth opportunities and leveraging increased market liquidity. This significant strategic shift points to higher overall market sentiment to come.

UK real estate market overview

Following months of stabilisation, the UK real estate market is reaching, or has reached in some cases, an equilibrium point. Not only has the level of capital value decline for out-of-favour sectors moderated, but competition among the favoured and best-in-class assets has strengthened for certain segments of the market. With income returns across the favoured sectors remaining robust, total returns for the residential, industrial, and hospitality segments are now comfortably in positive territory year to date. Out-of-favour segments are struggling, largely because of limited liquidity, with a reasonable bid/ask spread remaining in place.

According to the MSCI Quarterly Index, all property saw capital values stabilise at 0% over the second quarter of 2024. As expected, the favoured sectors of retail warehousing, industrial, and residential drove positive growth at 1.5%, 0.6%, and 0.6%, respectively, while offices lagged at -1.8%. As ever, the bifurcation between best-in-class assets and poorer-quality stock will continue to widen as transactions pick-up, with offices offering the greatest opportunities. 

Total returns increased over the second quarter to 1.2%, given less severe capital declines. The favoured sectors prevailed, as with capital value growth. The retail warehouse sector, in particular, posted a very robust return during the second quarter, with a total return of 3.1%, the strongest return for any segment. During the first half of 2024, all property saw a positive total return of 1.9%.

The UK REIT Index has generated a total return of 23.1% in the 12 months to the end of the third quarter, according to FTSE EPRA. The UK direct real estate market has historically lagged the UK REIT index by six-to-nine months, which provides a greater level of confidence that we are entering into a growth phase for UK direct real estate. In addition, UK REITs have been actively raising capital to deploy into growth strategies, rather than balance sheet repair, with a total of £2.27 billion raised in 2024. This sentiment is carrying over to the direct market, where the second quarter of 2024 recorded the highest investment volumes since the third quarter of 2022 at around £15 billion. Cross-border and private capital have been the most active year to date on the acquisitions side, while disposals from institutions have slowed from their recent peak in 2021.

Asia Pacific (APAC) real estate market overview 

The start of the Fed’s rate-cutting cycle has helped market sentiment, but the policy outlook in APAC remains divergent. Besides structural challenges in Hong Kong and China, we believe property yield gaps in most markets/sectors have room to expand. Repricing has lagged other regions amid a weaker occupier outlook. Consequently, our base-case scenario remains for APAC’s real estate market recovery to be long and slow.

Performance bifurcation between newer and older central business district (CBD) offices has widened in several markets, presenting investors with potential value-add opportunities. That said, investment strategies will need to go beyond just targeting a ‘green’ certificate, given stakeholders’ sharper focus on operational decarbonisation to meet net-zero ambitions. A truly forward-looking, value-add strategy for offices would have to plan for capital expenditure requirements to keep the building’s carbon footprint aligned to an operational decarbonisation pathway over the longer term. 

Among the APAC developed markets, Seoul remains our highest-conviction office market. Occupier market fundamentals in its key business districts remain sound, given low vacancies amid limited near-term supply. While more new supply is scheduled for completion from late-2026, we expect vacancy rates to remain tight, relative to history, even in the bear-case scenario. 

The living sector ranks highly in our investment preferences globally. Tokyo multifamily properties, backed by solid occupier fundamentals, remain popular among institutional investors. We think there are multiple tailwinds to support further rental upside. Net migration, coupled with better wage growth and more dual-income households, will underpin leasing demand and affordability. But thinner development margins, because of higher land and construction costs, have discouraged new projects. This has constrained future housing supply. Limited supply is also keeping condo prices high, which is encouraging households to rent (rather than buy). 

Excluding Hong Kong and China, investment opportunities appear limited for opportunistic strategies, given the slower-than-expected repricing. An exception could be Greater Seoul’s logistics properties. Distressed opportunities have emerged as more assets with non-performing loans are put up for public auction. While speculative cold-storage developments remain a near-term drag on occupier fundamentals, we think vacancy rates could start to contract from 2025.

North American real estate market overview 

While interest rate cuts are welcome, starting out with a large cut doesn’t mean a large fall in yields is guaranteed. The reset in valuations over the past three years has been quite mild, compared with the magnitude of the interest rate shock. Spreads to 10-year yields remain well below historical norms.  

In the past three years, 10-year yields have climbed 230bps. Industrial yields increased by only 116bps, multifamily yields expanded by 125bps, and even offices – which charted the biggest hit to yields – only expanded by 170bps.

This means that to bring the spread back up to historical norms, yield compression should be modest in the future. Accordingly, we think there is a long-term floor to yields. Future pricing will likely be dictated by net-operating income growth. 

That said, we are probably at the end of the tunnel in terms of capital value decline. We forecast capital growth of 1.4% for the three-year annualised period, driven largely by industrial and apartment performance. But there is growing bifurcation across the North American markets that we cover.

Global market summary – outlook for risk and performance

As we near the end of 2024, most overall real estate price corrections seem to have concluded. Notably, some sectors in the UK and Europe have seen values increase. Consequently, our September 2024 multi-asset houseview has upgraded global direct real estate from neutral to overweight. This indicates that an underweight allocation is no longer beneficial to multi-asset portfolios – a significant call for an asset class that moves in and out of favour less frequently than more liquid asset classes.

Capital value expectations vary by sector and region, with APAC on a different trajectory. Sectors missing thematic benefits and low-quality assets facing high retrofitting costs because of strict environmental regulations are still at risk. We anticipate further capital declines for these assets.

We are more optimistic about sectors with strong fundamentals like logistics, residential, retail warehouses, and some alternative sectors. High-quality central office spaces are also looking more valuable as rents rise under a short-supply backdrop. These sectors have low vacancies, limited future supply, and strong demand boosted by thematic trends. Data centres and strategies looking to harness the opportunities in the energy transition and rising power demand are growing substantially. 

Expected returns are rising. We forecast a global all-property total return of 4.6% over the year to September 2025, with annualised returns of 6.9% over both the next three- and five-year periods. While geopolitical and economic risks are rising, real estate risks are diminishing, and more opportunities are emerging. There will be attractive investment pricing points for those with equity this year and next year.

The UK and parts of Europe are expected to lead the recovery. APAC faces a muted cycle because of China's real estate issues and Japan's monetary policies. The US recovery is slower, as European central banks ease policies ahead of the Fed. Logistics, alternatives and residential sectors should outperform retail and offices. Retail warehouses and core CBD offices offer better performance within their broader sector categories. 

Strategic outlook

Cycle

The market correction is nearing the latter phases of the cycle, and we expect conditions to improve during 2024. Our three core phases of this cycle remain in place:

Opportunities 

Core/ core+/specialist diversified strategies
• Cyclically, the next 6-12 months are a great time to enter the market.
• Logistics (over-corrected), prime CBD offices (consolidation to core), living sectors, hotels (resilience and portfolio diversification), and dominant retail warehouses are the preferred sectors.

Value-add strategies
• Exit pricing is the key now, but no rush to commit.
• Office value-add assets are where entry yield >7% and location/amenities are strong, plus redevelopment if yields >10%.

Special situations
• Fewer in number as distress has reduced.
• Opportunities where refinancing fails.
• Developer insolvencies.

Global sector convictions

Source: abrdn September 2024. Non-risk-adjusted, local currency, absolute returns, excluding transaction fees. Arrows reflect recommended portfolio sector tilts for balanced funds, Q4 2024.

Past performance is not a guarantee of future returns.
Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed, and actual events or results may differ materially.

Global market risk

The abrdn Global Risk Navigator measures the comparable risk of implementing a direct real estate strategy across individual or multiple jurisdictions, globally. Lower scores indicate lower risk to the expected outcome. It uses nine sources from our proprietary research, in-house data, and external sources. It has a 50% weighting to environmental, social and governance (ESG) metrics, including measures of climate policy, vulnerability to climate change, social stability and the strength of governance. This gives our Global Risk Navigator a strong link to emerging physical climate and transition risks, while also using more traditional risk measures, such as liquidity, transparency, and market size. 

As a mature and relatively transparent market, Europe typically has the lowest country risk scores, with France, Germany and the UK leading the global ranking. The Nordics generally score well on ESG measures, but market size and liquidity risks can weigh on their overall scores. The US has fallen down our overall ranking since the introduction of a greater weight to the five ESG factors. APAC has a wide spread in scores across the region, with countries affected by lower transparency, market size, climate risk, and economic risk. More developed APAC economies, such as Japan and Australia, have lower risk scores than emerging economies.