Real Estate: What to expect in 2024?

By Nicholas Garattini , Head of Business Development Generali Real Estate

According to the ECB, eurozone GDP is expected to grow by 1% in 2024, with inflation easing to 3.2% and reaching the 2% target in 2025. However, market volatility and uncertainty remain very high amid global geopolitical tensions.

In such a scenario, real estate is expected to gradually adjust to the new high interest rate environment, just as it did in 2023 with a significant slowdown in the market.

In 2024, we do not expect all sectors to be the same and, moreover, a strong polarisation is expected even in sectors with a positive outlook. At Generali Real Estate , there are several key sectors we believe could, selectively, offer good investment opportunities in terms of risk-adjusted returns for 2024.

Logistics

The first is the logistics sector, which is expected to benefit from the continued growth of e-commerce and the significant slowdown in construction, leading to a shortage of first-generation space and record low vacancy rates in most European markets.

These trends are generating strong tenant demand and solid rental growth, even above inflation, enabling the sector to remain attractive even in the light of current levels of interest rates.

Quality locations will command a premium, as rent still represents a limited proportion of tenants’ P&L.

Hospitality

Second is hospitality. The hotel sector in Europe in 2024 is expected to continue to positive dynamics showed in 2023, with the dynamics around high-end leisure remaining favourable in both the short and long term, and the economy segment retaining its gains from the post-COVID recovery.

Moreover, Europe is generally undersupplied in terms of high-end hotels (i.e. managed by large brands able to offer high quality with economies of scale), so there are significant opportunities for selective growth in high quality locations.

Several new operators, particularly from the Middle East, are looking to enter the market, bringing new services and capabilities. The hotel sector is able to quickly adjust to inflation as room rates can be changed on a daily basis, making the sector more attractive, albeit with more operational complexity.

Interest rates

Thirdly, we expect the real estate debt market will benefit from rising interest rates in 2024, increasing the profitability of the asset class.

Although further rate rises are not expected, the sector, especially the senior tranches, should offer attractive yields throughout 2024, as LTVs are still under control and total yields can be around 6% for the most defensive debt and up to 9% for construction loans.

Polarisation

Fourthly, offices will continue to polarise, with good location, high asset quality and sustainable buildings attracting most tenant demand. It is worth noting that in 2023, the market in gateway cities such as London, Paris, Milan and Madrid will reach historic highs in terms of €/sqm for prime assets.

Sustainability

Finally, it is worth noting that sustainability is now a key element that can influence decision-making on any investment theme. Investors are becoming more sophisticated and are demanding robust ESG programmes to understand what an investment manager is effectively implementing to make assets sustainable and net zero carbon in the long term.