For professional clients and/or qualified investors only

2024
Global Real Estate Outlook

Global Real Estate Outlook

Q6 Q7, 68161 Mannheim, Germany

2Columbia Threadneedle Alternatives

Contents
Key takeaways .................................................................................................................................... 4
Introduction ............................................................................................................................................ 6
Demographics –change is afoot and influencing decisions .................................................... 8
When is the buying opportunity? .......................................................................... 10
Real estate ......................................................................................................................................... 16a) Logistics: still an investor pick ............................................................ 17b) Retail ...................................................................................................................................... 18
		

a. High street retail: Europe in focus ........................................... 18

		b. Retail warehousing: UK in focus ................................................ 21

		c. US focus .................................................................................................................... 22c) Residential ...................................................................................................................... 24		a. Europe in focus: build-to-rent ......................................................... 24		b. UK in focus: affordable build-to-rent andsingle-family housing ................................................................................. 26		c. Europe in focus: purpose built student
accommodation ............................................................................................... 28		d. US in focus: rental growth and working age
population growth go hand in hand ....................................... 29

Conclusion ........................................................................................................................................... 31

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Global Real Estate Outlook

Key takeaways

1

2

3

4

A more stable
macroeconomic
environment should help
provide additional clarity
to investment decisions.
Financial conditions are
anticipated to remaintight heading into 2024
but should begin toloosen in the second
half of the year.

Global megatrends –demographics, digitisation,
deglobalisation anddecarbonisation – willcontinue to influence
return potential andsector allocation, affecting
different regions in different
ways. Assets must retain
functional relevance tojustify a place ininvestment portfolios –themes we will return tothroughout this year.

Demographic changes –an aging population,
along with a younger
population that will be
more technologicallyenabled, more physicallymobile and moresustainably motivated,
will direct the future of
the real estate acrossmultiple sectors.

These structural tailwinds
favour some sectors, andwe favour allocations tologistics, select partsof the retail market andresidential.
a.	Logistics – demand
driven by near shoring, onshoring and friend shoringas many corporates
looked to future-proof
their supply chains andagainst low vacancy rates
paves the way for positive
rental growth.
b.	High street retail –markets are benefittingfrom the solid recovery
of tourism, bothinternational anddomestic with luxury themost resilient area as
they look beyond their4Columbia Threadneedle Alternatives

500 N. West Street, Raleigh, NC 27603, US‘traditional’ products,
enhancing and expanding
their brands to include
hotels and hospitality,
offering a lifestyle choice
to their customers.
c.	Retail warehousing –the changing tenant
mix on retail parks is
improving consumer
appeal and lengthening
dwell time, transforming
retail warehouseparks into a day-to-day
spending destination,offering operational
resilience and robust
tenant demand in a low
vacancy environment.
d.	Residential – thehousing sector is beingtransformed by the
demographic changes,

but supply is notmatching demand interms of number, sizeand location. The costof buying has increased
beyond wage growth
and the unaffordabilityof homeownership
continues to see moredemand for the rented
sector.
e.	Purpose-built-studentaccommodation(PBSA) – this residential
subsector has rapidly
evolved from an oftenfragmented ownership
structure, outdated
stock, and smaller lot
sizes to an establishedinstitutional asset classoffering income andvalue-add potential.

5

6

We anticipate further
asset repricing in someregions and sectors will
present an attractive buying
opportunity for investors
brave enough to transact
in an environment which
does not yet offer fulltransparency.

Targeted acquisitions
are crucial, considering
geography, quality andsector at both themacro and micro levelto take advantage of thedislocation in the market.
Decisions should be
guided by long-term trends
supporting overarching
sector choices but paying
attention to the differences
and opportunities within,and between sectors,
subsectors, cities andsubmarkets will be crucial
too. Stock selection
remains an important skill
set to monetise structural
trends.

5

Global Real Estate Outlook

Introduction

The era of financialisation of real estate is over and we are entering an
era where real estate must be functionally relevant to derive value.
The real estate market took a long, deep breath in 2023 andheld it for a while. Volatility in financial markets, uncertainty
as to where and when sharp rises in interest rates would
eventually taper and persistently high inflation acrossjurisdictions dampened investor appetite for real estate,
delaying the much needed and long-anticipated recovery in the
sector. Investment volumes were greatly reduced against longterm averages and pricing became difficult to gauge. Occupiers
tightened their belts as corporate margins were squeezed
and consumer spending was reined in as inflation dented real
incomes and impacted household budgets.

6

As 2024 unfolds, while there are still several unansweredquestions, there seems to be a more balanced investor
sentiment emerging as some of the haze of the past twelve
months begins to lift. The path ahead is not without its
challenges, and it will change as the seasons do, but we do
anticipate a more stable economic setting which will feed intoa more manageable financial environment, helping to support
investor decisions and spur transactional activity on. We havenot seen the deluge of distress in real estate markets that many
had anticipated, and while we do not expect massive valuation
correction, we do expect there will be some repricing leading
to a greater buying opportunity of good quality assets. We also
expect the gap in expectations of buyers and sellers to narrow.

Columbia Threadneedle Alternatives

500 N. West Street, Raleigh, NC 27603, US

The key to success in 2024 will be access to dry powder
allowing for nimble transacting, along with sector and asset
selection. Investors need to understand the nuances within
sectors and work to deliver property that is functionally
relevant now and in the future. Investors will have to go wellbeyond the traditional bricks and mortar, job done approach.
The ongoing dichotomy between the volatility we have seen
in capital markets and largely supportive fundamentals inreal estate is producing a compelling dynamic not seen inprevious cycles.

“Global megatrends – demographics, digitisation, deglobalisationand decarbonisation – will continue to influence return potential
and sector allocation, affecting different regions in different
ways. Assets must retain functional relevance to justify a placein investment portfolios.”
Joanna Tano, Head of Research, Real Estate (EMEA)

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Global Real Estate Outlook

Demographics

Change is afoot and influencing decisions
There are numerous global trends that impact real estate today
and how it will develop in the future.
One of the key trends we would like to focus on is the enduring
trend of demographics. Why? Because it will have far reaching
impacts on certain real estate sectors namely logistics, retail andresidential where we think the impact will be the most significant.
The challenges and demands are multifaceted. As many
western countries face an aging population, we anticipate thatthe younger population will be more technologically enabled,
more physically mobile and more sustainably motivated,
all of which will direct the future of the real estate sector.
Environmental, social and governance (ESG) factors remain
firmly on the agenda and related considerations are becoming
more intertwined into occupier and investor decision making
processes.
The global population is increasing, as are the urban
populations in our focus regions of Western Europe and theUnited States, all the while embracing new ways of living andworking. Migration trends, a shrinking workforce as the baby
boom generation retire, an expanding older generation (+65
years) and the evolution of young and middle-aged cohorts, aremaking their impact felt too. So as the developed world ages,
at the same time Generation Z – those born between 1997 and

82012 – is coming of age and they will place different demands
on real estate.
The European population is projected to reach 762 million by2024, but there are notable differences across the continent.
Stronger population rises are being seen in cities of strong
economic and employment growth. The story is not dissimilar in
the United States. The uneven distribution of population growthand economic success across these two continents will likely
impact regional economies and total returns for real estate.

Key takeaway
Changing demographics will have
far reaching impacts on certain realestate sectors namely logistics, retailand residential where we think the
impact will be the most significant

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Boulevard, Grünwälderstraße 9–13 (unger.), 79098 Freiburg, Germany

Chart 1: GDP growth versus working age population growth (10 year CAGR to 2030)
Working age population growth is below the Europe + select US
city average but GDP growth is being driven by productivity

Working age population & GDP growth areabove the Europe + select US city average

AustinGDP growth

ZagrebWarsaw

Tallinn

DenverSalt Lake City

Bucharest

Vilnius

Riga

Nashville
DallasDublinRaleigh

Istanbul

GdanskAtlanta
Copenhagen
SeattlePragueAmsterdam Bristol
Portland
Budapest
Lyon Manchester
MadridNice
LondonFlorence
Bay AreaParis
BostonOsloBarcelona
Marseille
Glasgow
LisbonWashington DC
New York
AthensToulouse Stockholm
San Diego Berlin
Los Angeles
Birmingham
Edinburgh
Antwerp
Milan
Porto
MunichBrussels
ViennaLille Rotterdam
Malmo
Hamburg
HelsinkiRome
Pittsburgh
Cologne Frankfurt
The Hague

HoustonRed indicates US cities
Blue indicates European cities

Dusseldorf

Working age population & GDP growth are
below the Europe + select US city average

Working age population growth is driving GDP growth,which is below the Europe + select US city average
Working age population growth

Source: Columbia Threadneedle Real Estate Partners Research, Lionstone Research, Oxford Economics (Sept 2023), Moody’s. CAGR is compound annual growth rate.

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Global Real Estate Outlook

When isthe buying
opportunity?

Parkview, 3737 Cogdell Street, Houston, TX 77019, US

Real estate values have adjusted significantly in reaction to the new financial conditions andinvestors need to adjust to this new normal as well. There have been variations between sectors,
but the general direction of travel in terms of pricing has been the same – downwards.
We expect 2024 to be less uncertain and less volatile than
2023. It may be too early to see a marked improvement, but themarket dislocation will serve to unlock opportunities for thosewith experience and a level of conviction to see through theeasing haze and move into a more active buying mode. Whilst

we are not expecting a wall of distressed assets to come to themarket, be that in the UK, Continental Europe or in the US, we do
anticipate a rise in the volume of distressed sales as refinancing
remains challenging with a wealth of buying opportunities in
2024 and 2025 in particular.

#Next buying opportunity

Opaque2023
Source: Columbia Threadneedle Real Estate Partners Research.

10

VISIBILITY LEVEL

2024

Transparent

2025

2026

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BOX STD, UK

Regional opportunities
UK and Continental Europe may see double digit returns
Historically, after recent economic downturns in the UK and
the associated fall in commercial property capital values that
followed, the following two and five years has seen double digit

growth on an all-property total return basis. This is true of thelast five downturns that we analysed – see chart 2 below.

Chart 2: UK – taking advantage of cyclicality of the real estate sector
UK all-property capital value decline vs following 5 & 2 year all-property total return
20%
10%
0%
-10%
-20%
-30%
-40%
-50%

Nov ’89 - May ’93

Oct ’94 - May ’96

Cumulative all-property capital value decline

Jun ’07 - Jul ’09

Following 5-year annualised all-property total return

Nov ’11 - Apr ’13

Jul ’22 - Nov ’23

Following 2-year annualised all-property total returnSource: Columbia Threadneedle Real Estate Partners Research, MSCI UK Monthly Digest (November 2023).

11

Global Real Estate Outlook“We are expecting 2024 to be an improvement on lastyear for real estate investment. With values expected
to bottom out this year and new clarity on pricing, weare seeing opportunities emerge and a renewed
appetite for real estate.”
Hiti Singh, Head of EMEA
Alternatives Client Management
Columbia Threadneedle Investments

The story is similar across Europe whereby after recent periodsof market disruption and where capital values registered, often

significant, declines, the gains in the period following more thanmade up for the falls.

Chart 3: Europe – taking advantage of cyclicality of the real estate sector
All-sector capital value growth after periods of decline
30%
20%
10%
0%
-10%
-20%
-30%
2008/09, 2010/11

2011/12, 2013/14
Capital value decline

2020/21, 2021/22

Capital value increase

Source: Columbia Threadneedle Real Estate Partners Research, Property Market Analysis (November 2023).

But as always this is not uniformly true across all sectors,
geographies and quality of real estate. It varies at a country andcity level, for example in Germany, across the same time periods
the capital declines were not as dramatic as seen in some other
European locations and so selection under each of the three
categories requires careful and detailed due diligence. But what
is clear is the message, taking advantage of the cyclicality of thereal estate sector can make sense. While uncertainty remains,
looking for targeted opportunities now and over the next 18-24
months could see investors rewarded by strong returns.

12

Key takeaway
While uncertainty remains, looking
for targeted opportunities now andover the next 18-24 months could
see investors rewarded by strong
returns

Columbia Threadneedle Alternatives

US, with wide lender spreads, strong investment vintages expected to follow
US real estate investors are being hit by the double whammyof higher interest rates and tighter lending markets, resulting
in rising borrowing costs and downward pressure on equity

valuations. While that is not great news in the short run,
NCREIF returns following previous challenging cycles havebeen strong.

Chart 4: 2024 – 2026 should be strong vintage years
NCREIF total returns vs tightening lending standards
-40%

30%

-20%

20%

0%

10%

20%
0%
40%
-10%

60%

Net Percentage of Domestic Banks Tightening for Commercial Real Estate Loans to Large/Medium Firms (lha)

23

22

20
q1

21
20

20
q1

20

20
q1

20

19
q1

20

18
q1

17
20

q1

20

16
q1

20

15
q1

20

14
q1

13
q1

12

20
q1

11

20
q1

10

20
q1

09

20
q1

08
20

20
q1

20

07
q1

20

06
q1

20

05
q1

20

20

20

04
q1

q1

q1

20

q1

q1

20
q1

03

-30%

02

100%

01

-20%

00

80%

NCREIF Trailing 1-Year Total Return (rha)Source: Lionstone Research, Federal Reserve Bank of St. Louis (October 2023), National Council of Real Estate Investment Fiduciaries (NCREIF).

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Global Real Estate Outlook

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In 2001, 2008 and 2020 banks overwhelmingly tightened lending oncommercial and multifamily real estate loans. Concurrently, equity
valuations fell, with NCREIF reporting capital value losses of -1.6%, -24.1%
and -2.5% in the year following each period of tightening. After lending
spreads peaked, the NCREIF index reported above average capital value
gains of 6.7%, 7.6% and 12.5% in 2004, 2011 and 2021, respectively.
Our belief is the lending market normalisation in 2024 and 2025 could
result in similarly above-average gains.

Chart 5: A peak in lending spreads may create opportunity (capital value
decrease/increase, annual, %)
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

2001, 2004

2008, 20112020, 2021

Capital value decline (during lending tightening)
Capital value increase (after tightening peak)

Source: National Council of Real Estate Investment Fiduciaries (NCREIF).

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Global Real Estate Outlook

Real estate
Real estate has its role to play in providing income,diversification and is, to an extent, an inflation hedge.
The sector has shown, some might say surprising
resilience through the disruption of the last few years –performance that is largely thanks to buoyant occupiermarkets across the spectrum of property types.
Solid fundamentals and structural tailwinds arebringing some sectors to the fore, namely logistics,
select parts of the retail market and residential.

16Columbia Threadneedle Alternatives

Logistics: still an investor pick
The logistics sector has been the record breaker of recent years,
grabbing headlines for record high take-up levels, record low vacancy
rates and previously unseen double digit rental growth.
Covid-19 boosted demand for space and geopolitical events
highlighted the near shoring, on shoring and friend shoring as
many corporates looked to shore up their supply chains andserve their burgeoning online order books. It is well documented
how the sector benefited from growth in online retail andwith very low penetration rates in many markets there is still
opportunity.
The sector’s share of the investment market in Europe has grownsteadily from 10% in 2013 to 20% at the end of September 2023,
a similar trend to what we have seen in the US. There is a windowof opportunity for some buyers (often equity backed) to pick-up
good quality assets via sale-leasebacks transactions given the
disruption in the lending market. Companies in need of cash,
and there are plenty as higher inflation pressurised margins, areusing their own assets to raise capital. Timing is crucial as oncethe capital markets stabilise companies will be less motivated torotate out of balance sheet assets to unlock liquidity.
Investment grade stock is outweighed by demand and so someinvestors, looking for higher returns, are tilting an allocation of
their capital to the smaller, albeit growing areas of interest suchas urban logistics. Areas such as manufacturing, open storage/
truck terminals, and cold/dark storage logistics facilities are allrising in popularity, backed by occupier demand.

There are additional factors at play too, such as land constraints
and high replacement costs which are limiting availability in
key European logistics corridors. This is exacerbated by theslowdown in new development as debt becomes more difficultand expensive to obtain. Vacancy is therefore expected to stay
low well into 2024 supporting positive rental growth. Cities suchas Birmingham and Manchester in the UK, Paris, Barcelona
and Berlin (leading the charge for the German cities) should
outperform, but Prague for example should also benefit from theeastward movement of supply chains.
Logistics across Europe, like other sectors, must increasingly
comply with stricter energy efficiency standards. With a large
proportion of Europe’s industrial stock old and not meeting therequirements of today’s occupier this is focusing minds on the
futureproofing of assets via automation and sustainability.
In addition, the new stock that is being developed is limited.
Those that have the expertise and the ability to reposition older
logistics assets will be able to create additional value by delivering
energy-efficient warehouses enabling occupiers to enhance
operational efficiencies and reduce running costs. For example,
installing photovoltaic panels to roofs, feeding back energy tooccupiers, and lessening the reliance on the grid while reducing
energy costs.

There is an expanding depth of occupiers active in the sector
able to insulate income streams to an extent and the realestate dynamics are currently tipped in favour of those that own
logistics and industrial as there is limited new space coming
to the market in Europe and the United States. This should gosome way to driving on positive rental growth. Admittedly we are
not expecting the strong annual upswing in rents seen since
the height of the pandemic but still anticipate them being aheadof the historic traditional flatlining in rents that we had become
accustomed to.
In both Europe and the US there appears to be a strong
relationship between logistics property rent growth and householdincome growth. As shown in Chart 6, metropolitan areas such as
Prague, Dublin, Seattle and Nashville posted strong growth both inrents and income gains. Higher incomes may be driving increased
retail sales locally, supporting demand for warehouse space. Also,
expanding local manufacturing or distribution hubs may support
household income gains, which may in turn support logistics
property rent growth. Conversely, geographies such as Houston
and Rome, where household income growth lagged, also posted
modest industrial rent growth.

Key takeaway
Land constraints and highreplacement costs which are
limiting availability in key European
logistics corridors
17

Global Real Estate Outlook

Chart 6: Investment opportunities in logistics are closely aligned with growth in household income
9.0%
8.0%

Logistics rent (CAGR 2012 to 2022)

Los Angeles

Nashville

Atlanta

Dallas7.0%

Philadelphia

6.0%

San Jose

Miami

New York

Washington DC

RaleighCharlotte

SeattleDenver

BostonSalt Lake City

LondonEast BaySan Diego
AustinDublinSan Francisco

PortlandManchester

PragueChicago5.0%

BarcelonaBirmingham

LisbonDusseldorf

Marseille

3.0%

Hamburg
HoustonGlasgow
Lyon

Paris

2.0%

Budapest

BerlinPittsburgh

4.0%

MunichBrussels Rotterdam
Frankfurt

AntwerpWarsaw

Copenhagen

Lille
Amsterdam

Milan
Stockholm

Madrid

1.0%

Rome

0.0%
1.0%

Red indicates US cities
Blue indicates European cities

Helsinki

2.0%

3.0%

4.0%

5.0%

6.0%

Household income (CAGR 2012 to 2022)
Source: Columbia Threadneedle Real Estate Partners, Lionstone Research, Property Market Analysis, Oxford Economics, CoStar, Moody’s (October 2023). Median household income for the US anddisposable household income for Europe.

RetailHigh street retail: Europe in focus
High street retail markets across Europe are benefitting fromthe solid recovery of tourism, both international and domestic.
Retail was the second most traded sector in the year to September
2023 after offices with an investment volume of approximately€22.0 billion exchanging hands, equivalent to a 19% market share.

Travel, both domestic and international across Europe, had beensteadily picking up since the dip experienced in 2009 following
the Global Financial Crisis, although incomparable to the 65% fallseen in 2020 as governments around the world locked down theireconomies. This is good news for the retail sector as tourism is an
important indicator of the health of our international high streets.

Chart 7 – Overnight visits in paid accommodation in Europe
600,000

forecast

500,000+12%(000s)

400,000
300,000
200,000-65%

100,000
0
2017

2018

2019

2020

2021

2022
International

Source: Oxford Economics (November 2023).

18

2023
Domestic

2024

2025

2026

2027

2028

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Global Real Estate Outlook

Consumers accelerated their online spend during the COVID-19
pandemic, as the opportunity to visit physical stores waswithdrawn, but as economies reopened consumers voted with
their feet, returning to physical stores, prompting a gradualbut steady decline in online retail spending in most European
countries.
Navigating the retail landscape is not without its challenges foroccupiers. High street activity saw a revival as markets emerged
from an almost standstill during the pandemic as consumers
were allowed back onto high streets and into physical stores.
But inflation has eroded households’ purchasing power andsqueezed retailer margins. Having said that, those retailers
that are well capitalised have been able to look beyond thecurrent market conditions and are best placed to execute on
strategic plans, even if they have been scaled back. Although,with margins squeezed as rapid inflation rises took their toll,and despite recent falls, retailers are conscious of where andhow to deploy capital. There will be increased focus on store
performance with retailers trying to maximise the value of theirreal estate assets.
One area that has shown its resilience and strength is theluxury retail sector. Retail generally slowed down in 2020, an
inevitable consequence of the COVID-19 pandemic. But thesubsequent rebound has been nothing short of outstanding
with the global personal luxury goods market growing by 32%
in 2021 year-on-year (Bain & Company). And this is despite
current headwinds such as inflationary pressures and thewider economic slowdown, reflected in a general squeeze onhousehold incomes and subdued GDP growth. The resilienceof the global retail sector is shown in the subsequent 19% yearon-year increase that followed in 2022 with global turnover inthe luxury goods market reaching €345 billion.
There are a several key reasons behind this trend. One is thatthe impact of financial crises on consumers with a higherthan-average purchasing power tends to be more limited as

20

they have a greater financial buffer. A second is the growing
consumer base expected to expand from around 400 million
people in 2022 to 500 million by 2030. Thirdly, companies
which trade in luxury goods have spent time and money
successfully developing their omni-channel platforms in recent
years which has helped them to extend their distribution andreach higher numbers of consumers globally, boosting sales.
Luxury brands are also looking beyond their ‘traditional’
products and are enhancing and expanding their offering toinclude hotels and hospitality, providing a lifestyle choice totheir customers. The ‘traditional’ product allows the brand to
get closer to their target customers whilst the expansion into
hospitality helps them to elevate their brand. For example,
LVMH’s Cheval Blanc Hotels or Bulgari Hotels, who haveopened several hotels in global gateway cities and resort
destinations, are offering a combination of hospitality and theluxury experience in one, extending their brand reputation.
For a more in-depth coverage of European high street retailyou may enjoy our “European High Street” report published in
December 2023 (View the report).

Key takeaway
The resilience of the global retailsector is shown in the 19% year-onyear increase in 2022 with global
turnover in the luxury goods market
reaching €345 billion

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Retail warehousing: UK in focus
Retail warehousing continues to demonstrate its resilience andhas drawn considerable interest from institutional investors anda more diverse occupier base over the past few years. As thecost-of-living crisis squeezes household incomes, retailers inretail parks have by and large performed relatively well with footfall
figures close to 2019 levels, outperforming other areas of thewider retail market. Historically retail warehousing was lumped
together with high streets and shopping centres under the single
banner of retail but is now showing its worth and its diversification
benefits. Through UK national lockdowns retail warehousing
was able to show off its resilience and its flexibility, despite thedifficult and uncertain backdrop. As more spend moves online,
physical units and schemes have had to work even harder toattract footfall, offering a level of convenience, accessibility andexperience that cannot be replicated on the internet. Retail parks
can use their large formats to showcase product and establish
click-and-collect hubs.

The occupier market is strong. Vacancy rates are around
4.5%, low when compared to almost 14% for high streets
and almost 18% for shopping centres (as at H1 2023). There
has also been a notable evolution of occupiers looking toestablish a presence on retail parks. Traditionally a sector
that has focused on bulky goods retailers such as DIY,
furniture, carpet, electronic and kitchen operators, discount/value-orientated retailers (with a focus on homeware andfood) are increasing their presence, whilst some high streets
brands such as Marks & Spencer and Next have beenadjusting their networks, closing high street shops in favourof retail park locations. The number of F&B outlets in out-oftown locations is rising, including drive-thru restaurants andcoffee chains, as they look to capitalise on the robust footfall
levels to retail warehouse parks. In addition, services suchas dentists and vets are increasingly recognising that retailwarehousing can suit their business needs.

Chart 8 – Retail warehousing new openings (year-on-year)
9.0%

1,200
8.2%

8.0%
6.8%

6.0%

800
Unit count

7.0%

6.6%
5.4%
4.2%

600

4.5%

4.9%

5.2%

6.0%
5.1%

4.8%

4.4%

3.9%

5.0%
4.0%
3.0%

400

Vacancy (% sq.ft)

1,000

2.0%
200
1.0%
0.0%

0
2011

2012

2013

2014

2015

Openings (units)

2016

2017

2018

Average openings (units)

2019

2020

2021

2022

H12023

Vacancy (% sq.ft)

Source: Savills (August 2023).

The changing tenant mix on retail parks is improving consumer
appeal and lengthening dwell time, transforming retailwarehouse parks into a day-to-day spending destination, rather
than one-off discretionary spending one. And so, from an
investor perspective the sector offers operational resilienceand robust tenant demand equating to strong annualised
income returns and some capital value growth. Plus, with very
limited development satisfying retailer demand will only get
more difficult and continue to put upward pressure on rental

values. The strong occupier fundamentals and what appears
to be stabilisation in the interest rate higher investment
activity should begin to follow over the next 12-18 months
and we anticipate that institutional investors will focus oncore plus assets whilst more opportunistic investors will looktowards secondary assets, attracted by the softer pricing andopportunity to add/create value.

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Global Real Estate Outlook

US focus
The retail sector in the US, particularly mixed-use and strip
retail formats in cities with solid population and income growth,appears well positioned for success. Our focus for investment
is in markets with an above-average in-migration and growthin the 35 to 54 year-old age cohort. Broadly defined as themetropolitan statistical areas extending from Seattle, down
through the Rockies, into Texas and over to the Carolinas,
Georgia, and Tennessee, these markets posted 0.7% averageannual absorption in the strip retail space but have only 0.3%of strip retail under construction.

Chart 9: Strip retail: demand thrives in cities with favourable demographics
Demand vs supply (year-over-year growth, %)
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%

Atlanta

HoustonNashville

SeattleRaleigh-Durham

New York

Net absorption rate 5-year average
Source: CoStar (March 2023).

22

Washington DC

Under construction

Los Angeles

San Francisco

U.S. Avg.

Columbia Threadneedle Alternatives

Autry Park, 811 Buffalo Park Drive, Houston, TX, US(a rendering image)

In contrast, other markets that we cover posted demand
growth of just 0.1% over the same period, less than the 0.2%
of inventory now underway. Remarkably, Salt Lake City, Atlanta,
Seattle, Houston, Phoenix, and Nashville have demand growthabout three times current construction levels and enjoyoccupancies above those of the last ten years. However, thismakes sense. In addition to pandemic-driven migration, thesecities offer more affordable housing and often better-rated publicschools for the middle class than big coastal cities, valued
qualities for the 35 to 54 year-old demographic. Conversely,
the San Francisco Bay area, Los Angeles and New York areall suffering occupancies below their ten-year average as well
as new construction in line with or even higher than recent
absorption rates.

Strip retail: occupancy vs long-term average
100%

98%

96%

94%

92%

90%

AtlantaNashville

Raleigh-Durham

SeattleHoustonOccupancy

Washington DC

New York

Los Angeles

San Francisco

U.S. Avg.

Occupancy 10-year average

Source: CoStar (March 2023).

23

Global Real Estate Outlook

Residential
Europe in focus: build-to-rent
The housing sector across Europe is being transformed by the
demographic changes. Since 2000 the continent’s population
has grown by 54 million people. At the same time, we are alsoseeing a lower birth rate and people starting families later inlife. Both these trends drive the need for more housing andrising demand for single/two person households. Put simply,
the supply is not matching the demand in terms of size, number,and location.

Despite record low unemployment rates and strong wage
growth, the cost of buying a home in Europe has increasedby 45% since 2013, far beyond any wage growth figures.
The unaffordability of homeownership continues to see moredemand for the rented sector. Plus rising urban populations
across Europe are driving demand for housing in major cities– across the European Union urban populations are forecast
to rise by a further 9% by 2050 and with this the number ofhouseholds is expected to increase dramatically.

Chart 10: Earnings growth vs average house price growth (%, 2000 – 2020)

180
150
120
90
60
30
0

om

gd

in
dK

e

nc

Fra

ite

Un

ia

str

Au

e

zon

ro
Eu

Earning growth (%, 2000 - 2020)
Source: Oxford Economics (December 2023).

24

ain

Sp

y

an

rm

Ge

s

nd

rla

e
eth

N

Average house price growth (%, 2000 - 2020)

ly

Ita

Columbia Threadneedle Alternatives

Eurozone average house prices rose by 3.1% per annum
between 2000 and 2020, while wages rose by 1.9% per annum.
Earnings are 47% higher in 2020 than 2000, but house prices
are 86% higher. House price growth and interest rates hikes
over the past 18 months have pushed mortgage costs up
making it increasingly cheaper to rent homes than it is to buy,and despite mortgage rates coming down they are still well
above the levels seen over the last fifteen years.
At the same time, supply remains challenged given land
constraints, planning regimes, regulation, rising costs, in termsof labour, construction and material. Together these factors
continue to exacerbate the housing shortages in most major
European cities, pushing more and more people to the rental
market for their accommodation needs. And so, through aninvestor’s lens there are clearly reasons to be positive on
the outlook for residential real estate with the undersupply
supporting a positive outlook for rental growth and the sector
remains a top pick offering diversification, a largely untapped
depth to a maturing sector and, in part, an inflation hedge.
Europe’s main cities are chronically undersupplied with quality
residential stock and the trend is not showing any signs ofeasing. Plus, with less new supply and a squeeze on mortgage
affordability, positive rental growth looks set to be sustained.
Prime yields on Build-to-Rent (BTR) stock have compressed as
investors allocated more to the sector. Since interest rate rises
over the last 12-18 months however, across Europe the sector
has seen some repricing, albeit slowly. Residential has showna high level of resilience and the pace and consistency of therepricing has been more stable than in other sectors. There is
still a mismatch between buyer and seller expectations whichis slowing activity. It is likely that yields will move out in certain
markets because of the weaker macro-economic conditions andsellers accepting that pricing must soften to attract buyers backto the market could well stimulate more activity.
Stock is increasingly difficult to access with residential
construction costs having risen upwards of 10% in some
European markets over the past two years this has impacted
the delivery of new supply, and the development market isincreasingly challenging for the time being. Construction
inflation has begun to come down, but underlying costs are still
high, there is a shortage of skilled workers and development
financing is much harder to come by while higher interest
rates offset profit margins. This has seen some investors anddevelopers rethink new developments as a combination of
supply chain issues and rising costs push up overall delivery
costs, squeezing profit margins. Some investors therefore haveturned to either fully operational schemes or nearly completed
stock which carry a lower level of risk and here we haveseen early signs of yield stabilisation in standing stock. But
this situation is only exacerbating future supply in an alreadyundersupplied sector.
Markets like Dublin, Amsterdam and Lisbon are expected
to be long-term outperformers, while other markets such as
Stockholm, Vienna, Barcelona, Madrid and some Tier I German

cities have seen significant price corrections which should set
them up for a rebound in activity in 2024. Given the ongoinglevel of repricing due to much higher interest rates, more
opportunities are expected to emerge.
With a residential sector characterised by acute supply issues
and rising demand levels policy makers are facing more andmore challenges to finding housing solutions. As a result, there
is increasing pressure on local authorities and public bodies toprovide efficient public services and infrastructure to support
the growth. Some governments are adopting short-term fixes; inGermany the government is proposing a three-year national rent
freeze whereby landlords would still be allowed to raise rents,
but there would be stricter rules about how much more they
could charge and where. France meanwhile put in place a “rentshield” to cap rent increases to a maximum of 3.5% initially inplace for one year until 30 June 2023. This has been extended
to cap on consumer price index (CPI)-uplifts from the second
quarter of 2023 to the first quarter of 2024. In the UK private
landlords are offloading stock due to Energy Performance
Certificate (EPC) regulations that will come into effect by 2025
for new tenancies and 2028 for existing tenancies.
Such measures can ease pressure on tenants but may be
counterproductive if they discourage development or triggering
pre-emptive rent rises before they take effect. Ultimately,
soaring rents everywhere have the same underlying cause: afailure by the housing sector to provide enough supply where
demand is strong. This shortfall provides a great opportunity
for institutional capital to step into the sector, reflected in thegrowing share of residential in terms of overall investment
volumes. It has grown from 8% to 23% across Europe over thelast 15 years.
Despite the strong appetite, residential remains a relatively
small part of many investors’ portfolios. Growth in investor
appetite, despite the tough economic environment, is
supported by structural tailwinds and we think that Europe’s
residential market continues to offer a compelling and wide
range of products for investors seeking diversification together
with stable income streams with some degree of inflation
protection.

Key takeaway
Europe’s main cities are chronicallyundersupplied with quality
residential stock and the trend is
not showing any signs of easing25

Global Real Estate Outlook

Watling Grange, Skipton Road, Harrogate

UK in focus: affordable build-to-rent and single-family housing
The UK rental market has experienced significant changes
over the years. Rising house prices, stringent lending criteria,
and changing demographics have led to a surge in demand forrental properties. However, renters are grappling with various
challenges, including soaring rental costs, lack of long-term
security, inadequate maintenance standards, and limited choice.
These challenges have created an urgent need for innovative
solutions that address the concerns of both tenants andinvestors.
The rented sector in the UK is expected to reach 50% of
all households by 2039 and despite the progress made inbuild-to-rent provision, the UK still faces a severe shortage ofaffordable and high-quality homes for renters. Plus, the historicfocus on premium BTR leaves a gap for affordable rental
housing for median and lower-income households. Already low
levels of supply are being compounded by smaller landlords
offloading their properties partly due to the higher interest rateenvironment, but more due to (proposed) regulation changes toEnergy Performance Certificates. For example, all rental homes
must achieve an EPC C rating by 2028, the implementation of
the Buildings Safety Act, the Renters (Reform) Bill of May 2023
and tax changes, all of which have made buy-to-let increasingly
unviable. Many individuals and families struggle to find suitableaccommodation that meets their needs and budget. This
shortage not only impacts people’s well-being but also has
broader social and economic implications.

26

Amongst the undesirable consequences of this increased
pressure on the rental market are the disproportionate
constraints upon lower to middle income renters and key
workers. The largest renting demographic in the UK is the ‘low
to middle income working households’ – a group that is growing.
However, with wages and pensions failing to keep up withhousing prices, more families and older people are being pricedout of the housing market and many households have limited
options within the rental market and therefore compromise on
quality or opt to spend over 30% of their income on rent, whichis unaffordable for many. The situation is particularly acute forsingle earning households, lower quartile earners and those who
require larger homes. This does however provide an opportunity
to create good quality rental housing, with a focus on delivering
local affordability, aimed at an underserved market throughquality purpose-built and professionally managed rental homes.
Much like mass-market BTR the supply imbalance here issuch that the flow of capital and its deployment and ongoing
management can deliver core market investment returns,
underpinned by defensive and sustainable income streams,
and compelling growth drivers while creating positive impact
by increasing housing supply and improving the quality andenvironmental credentials of available residents’ homes.

Columbia Threadneedle Alternatives

Chart 11: Depth of the demand
2,000,000
Social housing

Affordable housing

Premium Rent/Home Ownership

1,800,000
1,600,000

Number of households

1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000

0
00
0,

00

10

00

,0
95

,0
90

00
,0

00

85

00

,0
80

00

,0
75

00

,0
70

00

,0
65

,0

00

60

,0
55

00
,0

00

50

00

,0
45

00

,0
40

,0
35

00

00

,0
30

00

,0
25

00

,0
20

,0
15

0

00
,0
10

00
5,

0

0

Income band (£)
Source: Columbia Threadneedle Real Estate Partners, UK Office for National Statistics, UK Household Finances Survey (August 2023).

More than 60% of existing UK renters live in houses rather thanmulti-family apartments. This equates to 3 million households
but within this single-family housing (SFH) represents just
0.3% of existing available stock. Investors in the build-to-rentsector have traditionally focused on purpose-built multifamily
flats in city centres, but some are now turning to suburban/
edge of town locations, seeking to unlock a far larger sector,
one that has thus far largely been untouched by institutional
capital. This also supports the UK government’s Levelling Up
agenda which aims to address the need to tackle social andeconomic inequality across the country. The ambition is to raise
the level of equality by empowering local governments to makedecisions at a local level as they have a greater understandingof what their local areas and communities need and where thegaps might be. These are not uniform across the UK and thedifferences are stark.

With construction costs high and not expected to fallsignificantly, despite an easing in inflation, some house builders
are struggling to fully develop out planned schemes and sohave increased multi-unit sales to institutional investors tooffset some of the risk, a risk that has been exacerbated by
the end of the Help to Buy scheme and the soaring costs ofmortgages. This has left some housebuilders with stock thatthey need to churn so that they can recycle the capital. It also
provides investors with relatively quick access to built stockand the ability to scale portfolios at speed whilst delivering
quality well-managed units to the undersupplied residential
sector. Doing so can secure long-term income streams with thepotential to capture positive rental at renewal and/or on newleases and grow capital value.

Key takeaway
Investors in the build-to-rent sector have traditionally focusedon purpose-built multifamily flats in city centres, but some are
now turning to suburban/edge of town locations, seeking to
unlock a far larger sector
27

Global Real Estate Outlook

Europe in focus: purpose built student accommodation
The purpose-built student accommodation (PBSA) sector is oneof the more dynamic across Europe’s real estate landscape andhas undergone remarkable change and growth over the past
few years, boosted by its countercyclical benefits. The sector isevolving from an often fragmented ownership structure, outdated
stock, and smaller lot sizes, suffering from lack of coordinatedand professional management. With a large number of students
relying on the often expensive private rented sector for theiraccommodation needs, it looks set to attract rising interest frominstitutional capital.
Growth in the sector is being driven by a strong student population
growth, in particular a rise in international students. Activity isfurther supported by the changing student demographics anda heightened focus on a quality living experience. There is astrong case for both mid-range and high-end student housing.
Mid-range aims to offer relatively affordable accommodation,
primarily targeting domestically mobile students typically in regional
cities with good universities and low vacancy levels in the private
residential market. High-end accommodation offers additional
amenities such as gyms, laundry rooms and communal areas
for socialising and entertainment. One of the obvious attractionsof the PBSA market is that it provides amenities and services allunder one roof, and which are typically included in the rent paid.
PBSA also goes some way to help alleviate the widespreadpressure on the private rented sector (PRS) which can beoverrented, and students having to navigate entry barriers suchas unfamiliarity with the local housing market and contract
law. As more households are forced to the rental market asaffordability in buying a house continues to skyrocket, this

implies that there is more competition in the PRS that is alreadyfacing supply shortages and so forcing students to pay high rents
for accommodation in an already crowded private rented market.
This scarcity creates opportunity for joint ventures between
developers, operators, and capital to create products that are
fit for the future needs of changing student requirements. At
the same time creating scale that can either be managed orparcelled up and sold on when the time is right. Platform deals
are popular as investors can build scale quickly without having
to invest time and resources to set up an operating platform
in-house or be slowed down by build-up strategies. In addition,
universities are looking to divest of stock with bigger roles forprivate sector partners that can deliver the right solutions interms of accommodation portfolios.
The UK, France, Germany, Spain, and the Netherlands are
key markets in Europe. Primary cities in each country are
predominantly the focus but quality, purpose-built student
accommodation close to universities and amenities is typicallyundersupplied in many European markets. Challenges aroundland acquisitions for development, the lack of standing investableassets and current pricing levels are issues that investors
face. Some seasoned investors are therefore beginning to lookat strong second Tier cities where there has been, or there ispotential for some growth in higher education.
The European student housing market is severely undersupplied,both in terms of quantity and quality. Provision rates (*theproportion of beds per student) according to Savills, vary widely
by country in Europe, ranging from 4% in Italy and Portugal to
32% in the UK.

Chart 12: Purpose Built Student Accommodation – select European city provision rates
40%
35%
30%
25%
20%
15%
10%
5%

Ox
fo

rd
Yo
Lo rk
Am ndo
ste n
rd
am
Ut
Aix rec-M ht
arse
To illeulouseL
Th yon
eH
ag
u
Mu e
n
Ro ich
tte
rd
a
Wa m
rsa
Po w
zn
Ha ań
mb
ur
g
Be
rlin
Fra
nk
fur
t
Lil
Pa le
ris
Wr IDF
oc
ław
Tri
cit
Ma y
Ba laga
rce
lon
Ma a
d
Co rid
log
n
Kr e
ak
ów
Łó
d
Se ź
vil
le
Mi
lan
Va
len
cia
Po
rto
Lis
bo
n
Ro
me

0%

Source: Savills (2022).

28

1211 E. 5th Street, Austin, TX 78702, US

Columbia Threadneedle Alternatives“We believe many cities with excess
apartment supply in 2024 provide investment
opportunity as household income andpopulation growth drive rent and demand
gains over economic cycles.”Hans Nordby, Head of Research &Analytics, Real Estate (US)US in focus: rental growth and working age population growth go hand in handIn both the decade preceding the pandemic and more recently,
markets with strong working age population growth such as
Raleigh, Atlanta, Dallas, and Austin posted above-average
residential rent gains, despite these markets also being
characterised as cities with low barriers to new construction.
In contrast, markets with high perceived barriers to supply suchas the Bay Area, Los Angeles and New York City either moved
to a below-average level of rent growth or remain unchanged.
We believe the most attractive markets for investment overeconomic cycles, such as 2010 – 2019 time period shown below,
have both household earnings and working age population growth.

Chart 13 – Cities with higher income growth have seen higher rent growth(10-year market asking rent CAGR, % vs median household income CAGR, %)4.0%

Phoenix

San Jose
SeattleDenver

3.5%
RaleighAtlanta

San FranciscoMarket asking rent CAGR (%)

Portland
Tampa

3.0%

San Diego
Dallas-Fort WorthJacksonville

Los Angeles

2.5%
Columbus
Washington

Cincinnati
Kansas City

Indianapolis

2.0%

HoustonNew York

AustinNashville
BostonCharlotte
Miami

Salt Lake City

Oklahoma City
Pittsburgh

1.5%

Milwaukee
Red indicates IC cities
Blue indicates Non-IC cities

1.0%
1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Median household income CAGR
Source: Lionstone Investments, CoStar for the 10-years ending 12/31/19. Internationally competitive (IC) cities are those that score highly in a proprietary market ranking that evaluates economic
growth, demographic trends, sustainability, and the business climate. The rankings are run on an annual basis. CAGR is compound annual growth rate.

29

Global Real Estate Outlook

We also believe that the current apartment market offers
attractive opportunities for investors carefully seeking
submarkets with attractive supply and demand fundamentals.
Apartment submarkets nationwide are generally facing higher
current levels of supply than historic demand growth. However,there are submarkets where near-term supply is less thanhistoric demand growth including River Oaks in Houston,Orem and South Jordan in Salt Lake City and Forsyth County in
Atlanta. All these submarkets are also located in metropolitan
areas with above-average working age population growth.

Chart 14: Select US neighbourhoods stand out for apartment investment opportunities(10-year average net absorption, % vs share of existing inventory underway, %)15.0%
NoDa (Washington DC)

13.0%

N Utah Co (Salt Lake City)

Forsyth Co (Atlanta)

11.0%

Net absorption rate (10-year average)

S Jordan (Salt Lake City)

9.0%

Lake Union (Seattle)

Boston Seaport
Orem (Salt Lake City)
SoMa (San Francisco)

7.0%River Oaks (Houston)

5.0%

3.0%

1.0%

-1.0%
Locations above the line are experiencing more demand forresidential space than supply currently under construction

-3.0%
-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

Existing inventory underway (%)
Source: Lionstone Research, CoStar (December 2023). Net absorption is a measure of demand for real estate and reflects the total amount of space that has been rented minus the amount of spacethat has been vacated during a set time frame. A market with positive net absorption indicates a stronger demand trend.

“Both the macro and the micro lenses are necessary to take advantageof the dislocation in the market, see through the lingering uncertainty anduncover those opportunities that could very well deliver strong returns.”
Joanna Tano, Head of Research, Real Estate (EMEA)

30

North Hills Innovation District, Raleigh, NC, US(a rendering image)

Columbia Threadneedle Alternatives“Tight financial conditions
in early 2024 should yield fertile
ground for investment in selectreal assets with strong demand
fundamentals, especially those in
housing, logistics and retail.”Hans Nordby, Head of Research& Analytics, Real Estate (US)Conclusion
We expect more opportunities to come to the market overthe next twelve to twenty-four months. Financing conditions
will remain tight although begin to loosen in the second halfof the year but, acquisitions need to be targeted, not justgeographically but in terms of quality and at a sector level too.
The era of financialisation of real estate is over and we areentering an era where real estate must be functionally relevant
to derive value. Decisions should be guided by long-term trends
supporting overarching sector choices, but the differences andopportunities within, and between sectors, subsectors, cities
and submarkets will be crucial too.

Contributors
Joanna Tano

Hans Nordby

Head of Research, Real Estate (EMEA)Head of Research & Analytics, Real Estate (US)Columbia Threadneedle Investments

Lionstone Investments, part of Columbia
Threadneedle Investments

31

Global Real Estate Outlook

To find out more, visit columbiathreadneedle.com
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