Real estate: How megatrends are reshaping the market
Residential and commercial real estate has been in crisis over the past few years, but now cyclical tailwinds and global megatrends are pushing the sector firmly in the direction of recovery. As so often in the past, real estate is once again becoming a bedrock real asset investment.
Real estate has long been seen as the anchor of the real assets class — but factors such as COVID-19, high borrowing costs, and the digitalization of work have combined to bring an extended period of volatility. Yet all markets find their level, so is it time to revalue real estate?
Real estate is the most familiar real asset class for many investors, who recognize the attractive niche that property occupies in the asset universe. “If you look at long-term returns, property sits somewhere between equities and bonds. When it comes to real estate, this is just where it should sit in terms of its risk-return profile,” said Bill Page, Head of Real Estate Research, Private Markets at Legal & General Asset Management. “As an asset class, real estate can offer some bond-like characteristics in that income streams are contractual and predictable, and sometimes inflation-linked. But there’s also an element of equity-like performance, with values rising with markets and the economy.”
After two straight years of pandemic-driven decline, new investment in global real estate is rising sharply. According to forecasts by Savills, based on data from across Europe, Asia, the US, and Australia, real estate investment should total just under USD1 trillion in 2025, a strong rise of 27% following a smaller uptick in 2024.
Those figures do not include the Middle East, where according to global real estate advisor CBRE, the new-build real estate pipeline in the area covered by the Gulf Cooperation Council (GCC) alone amounts to another USD1.68 trillion, with more than half of that to be contributed by Saudi Arabia.
Tailwinds are stronger than the headwinds
There are strong fundamental drivers behind this recovery. In addition to the cyclical upturn in many western economies, megatrends such as demographics and digitalization are also at work.
These drivers are tracked in the Commercial Real Estate Megatrend Resilience Index from Oxford Economics, which calculates how well all real estate markets, including residential, will respond to structural alterations. According to the Index, European and US real estate markets are relatively well-placed to benefit from change.
Climate change is a driver — and a risk
One significant but often overlooked factor in the real estate investment calculus is climate change, especially in the US. Technology is enabling population movements to warmer climates — for example, northern states, such as New York, Massachusetts and Washington, are experiencing population declines, while southerly states, such as Florida, the Carolinas and Texas, are gaining working-age populations. But that very population shift is also increasing the impact of climate-related disasters on the real estate sector.
Like other private asset sectors, real estate is influenced by global megatrends. As an example, as populations move to areas of lower taxation and higher climate risk, there will eventually be need for more public infrastructure and higher taxes to support and protect rising populations. “We are increasingly aware that short-term success stories might be storing up issues for the future,” said Page of Legal & General Asset Management.
Undersupply and rising demand
If residential real estate has been a mixed market over the past few years, the market for commercial office space has been volatile as businesses vacated premises during the pandemic and only gradually returned to on-site working. Yet this segment of the market is also now in turnaround mode — one that paradoxically is being driven by the cumulative effective of weak demand.
In many developed markets there is now a shortage of quality space after several years of low development rates, said Chris Hunt, Co-founder and Director at UK workspace developer V7, saying that the premium for quality is high and rising, creating a wave of demand for new commercial development and investment capital.
“There are still a lot of empty buildings out there,” added Hunt. “But if you’re able to produce best-in-class in a market where there’s not a lot of competition because no one’s built any stock, you’ll see companies wanting to take the best office space. From that perspective, right now is as good as we’ve seen — it’s really the buying opportunity of our careers to secure underperforming real estate with great potential.”
Planning remains the big “but”
If there’s one overarching restraint on the recovery of real estate as a real asset investment prospect in developed economies, it’s planning. It remains too difficult to get planning approvals that will satisfy the resurgence of demand.
“Property supply can be broadly inelastic,” said Page. “If you look at the UK, and parts of the US, there are regulatory and political restraints that create friction and a risk for residential real estate development. It’s a very stark contrast when you consider somewhere like Japan, which has a very clear zoning system so you know exactly where you can build.”
Planning is a risk that’s deeply embedded in the politics and practices of many economies — investors have little choice but to accept the realities of local regimes, or choose markets where planning is more supported, even if they come with higher risks attached. In the meantime, the combination of rising markets and the increasing range and sophistication of investment vehicles is bringing animal spirits back to real estate investment right across the globe. That doesn’t mean real estate is the asset for everyone. But it does mean the mood music has changed — for the better.
“In terms of fund structures, there’s an intuitive mismatch between daily trading and real estate being a fundamentally illiquid asset,” said Page. “But funds are evolving in a way that will give investors flexible access point to the sector.”
That new sense of stability is helping to reposition real estate back at the center of the real assets’ universe, with quality being the watchword as the turnaround gains traction.
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