Real estate trends: 2024 and beyond

What a difference a year makes… In part one and part two of this series in 2023, we shared our insights and predictions for the real estate market. Back then, the Covid-19 pandemic was behind us, but the war in Ukraine was already taking its toll on European markets. Inflation skyrocketed, supply chain issues intensified, and we all know what interest rates did.

Fast forward a year: What’s changed? And what’s next?

Join us as we take you through the 10 key insights you need to know about today’s real estate landscape. 

While real estate transactions in the market haven’t come to a complete standstill, we continue to see stagnation and postponements of transactions. Why is that? It’s primarily due to sellers expecting to maintain or receive higher values for their assets at a time when buyers may no longer be willing to pay the same multiples compared to a year ago. As we had foreseen, real estate transactions generally dropped or stagnated at the end of 2023 and beginning of 2024. We expect some form of repricing to happen in the next 12 months.

The construction market continues to take a hit due to lackluster demand and concerns around increasing construction costs. Following inflation slowdown, however, we should see them stabilize.

The worst might be behind us as transactions are expected to pick up in the second half of 2024, and have already started for some asset managers.

Cash is still king, mainly because banks are increasingly careful when it comes to providing financing for real assets. This means it is critical for market players to properly manage and monitor their liquidity position. What’s more, leveraged funds are experiencing cash flow constraints. 

Interest rate volatility has continued as central banks maintain rates to counter inflation. Banks are revisiting their lending conditions and increased margins may compensate certain borrowers’ increased risk profiles. Bank covenants and the ability to generate cash are also expected to be a focus for lenders.

Alternative providers of finance  are always more competing with banks. This period of uncertainty has led to creative new ways of financing and refinancing. Don’t miss Navigating real estate debt funds which explores why real estate debt funds are an appealing alternative to traditional real estate funds. With tokenization and retailization as emerging trends to keep an eye out for. Some market players have also put more focus on ELTIF 2.0 to optimize retailization. 

Higher interest rates mean return expectations are narrowing due to the external cost of funding. As such, there is likely to be a competitive advantage for equity/deep pocket investors that do not need to borrow. However, this also unleashed an opportunity to invest more in real estate debt funds rather than traditional real estate funds. 

In this current climate of uncertainty, we observed that investors tend to further prioritize returns over other considerations. So even if there are a number of ESG funds being created, they appear less significant than non-ESG funds. That said, it would be premature to draw conclusions as, depending on the location of investors, some jurisdictions seem more advanced and continue to put more efforts into ESG matters than others.

Additionally, some efforts are being put by asset managers on identifying good potential assets and retrofitting them to futher align with the Fund’s sustainability measures, spending capex to impact positively on the asset’s ESG profile. ESG is also part of the due diligence measures, for example asset managers adapting European Association for Investors in Non-Listed Real Estate Vehicles guidelines (INREV) would need to look into INREV’s ESG due diligence to comply.

There had also been additional ESG reporting requirements due to regulatory factors and increased demand from investors. 

Auditors are currently assessing the impact of their clients’ valuations. Inevitably, there was a sharp decline in some portfolios, while others had already gradually undergone adjustments in 2022. 

As for development projects, we have seen inflation clauses added in construction projects and/or capping costs before construction even started. In light of current cost fluctuations, however, it continues to be challenging to value development assets. 

Technology is very high on the agenda for asset managers as a means of reducing cost and identifying process efficiencies. For asset managers, this is an opportunity to get ready for the rebound or even the next real estate market boom by implementing streamlined processes and more automated systems.

This also applies to the buildings themselves: Now is the time to integrate the ever-increasing number of the smart technologies available on the market, not to mention solar panels and other energy-saving tools and products.

Talking about smart technologies, Generative AI is a game-changing technology, offering innovative ways to engage users and generate content with deeper insights. It is opening up entirely new avenues for improving experiences, delivering new value streams and transforming business models. KPMG combines our deep industry expertise and advanced technical skills to help business leaders harness the power of AI to accelerate time-to-value in a trusted manner – from strategy and design through implementation and ongoing operations.

Tenants’ mindsets have not really changed. They still want more modern spaces tailored to their needs. Some might also require some ESG-centric offices depending on their company’s ESG objectives. Due to the continued impact of inflation and high interest rates, however, market rents have continued to rise.

High interest rates mean that more and more residential properties are too expensive for younger generations, resulting in a need for more residential properties for certain locations.

With remote work trends, office investors are meeting more challenges when it comes to both valuation and finding tenants. Furthermore, Tenants require much less space thanks to innovation brought by technology and work from home policies.

Other special types of assets such as logistics are becoming build to rent. Where investors already identify tenants before construction even. Data center is also an asset class gaining traction as we all continue to develop on technology.

Operational real estate continue to prosper, Care homes and student accommodation continue to cater to the specific needs of the tenants (e.g. creating common areas where the tenants can mingle). 

Governments worldwide have implemented massive support packages to tackle inflationary pressure and counter the current economic headwinds (e.g. energy price caps and allowances to support the most disadvantaged households). Given the impact of these measures in terms of deficits and public debt, as well as the need for additional spending (particularly in the areas of defense and energy transition), it is probable that some governments will have to consider fiscal consolidation programs and/or punctual tax increases in the years to come.

As Heraclitus said, the only constant in life is change. All things pass and nothing stays. This means that during this period of ups and downs in the real estate market, managers will have to ensure that they have robust change management plans – be it around their regulatory process or even their people and products. 

There’s no denying that we’re experiencing challenging times, but we strongly believe that the community – be it asset managers, servicers or individuals – will rebound.

We remain optimistic and predict that, together with the infrastructure asset class, the real estate sector will continue to prosper and be amongst preferred investments for years to come.

Our passionate team of KPMG Real Estate specialists is always one step ahead. We have developed a multi-disciplinary approach where we combine our expertise and leverage our global real estate network. This means we are fully equipped to help market players adapt to the current global crisis and manage the consequences, whatever they may be. Reach out and let’s tackle today’s real estate changes and challenges together!

This article was co-written by Pierre Kreemer (Partner, Head of Real Estate, KPMG Luxembourg) and Gaultier Saussine (Partner, KPMG Luxembourg).