Global economic outlook

Activity

As we usher in 2025, the global economic landscape unfolds with a mix of robust growth prospects and looming challenges. The US finds itself in a position of strength, propelled by anticipated tax cuts, increased defence spending, and a relaxation of regulatory policies under the Trump administration. These measures are expected to modestly accelerate growth, countering the negative impacts from heightened tariffs and a slowdown in net migration. Yet, the path ahead is uncertain, heavily contingent on the administration's policy decisions, which could either bolster or undermine economic activity.

Across the Atlantic, the UK's economic momentum is decelerating, with growth figures undergoing downward revisions and the economy struggling to expand in recent quarters. This slowdown is in part a reflection of policy measures aimed at funding Labour's growth-centric agenda amid a tightening fiscal landscape. The pressure on borrowing costs and a sell-off in the gilt market further cloud the UK's economic prospects, raising questions about the feasibility of Labour's fiscal strategies.

The Eurozone presents a picture of fragility, with disappointing retail sales indicating a tepid recovery. Despite a backdrop of easing monetary policy, the risk of Trump's trade policies adds to the headwinds facing growth. Yet, there's cautious optimism that the region will avoid recession, supported by a moderation in the negative fiscal impulse.

In Asia-Pacific (APAC), China is bracing for the impact of escalated tariffs, with policy easing on the horizon to mitigate economic fallout. Japan's economy, though slowing, displays resilience, underpinned by strong consumption and business sentiment. Australia and Korea, facing their own sets of challenges, are poised to continue with monetary easing to shore up their economies amid external and domestic pressures.

Inflation

The inflation landscape varies across regions. The US is enjoying a deceleration in core inflation, though this trend is threatened by a mix of demand-side stimulus and supply-side shocks. The UK is witnessing an unexpected drop in the Consumer Price Index (CPI), with the potential for future price increases as businesses grapple with rising labour costs. The Eurozone is seeing a slight uptick in inflation, driven by specific components, though domestic pressures seem to be easing and the overall rate should not depart too far from the European Central Bank (ECB) target. Australia is contending with persistent inflationary pressures, with CPI remaining above the central bank's target range.

Policy

Monetary policy adjustments are tailored to regional economic conditions. The Federal Reserve is adopting a cautious stance, with limited rate cuts anticipated amid concerns over inflation and a robust labour market. The Bank of England is maintaining its policy rate, with the potential for future easing influenced by inflation and wage growth trends. The ECB is opting for gradual rate reductions, steering clear of aggressively accommodative policy unless faced with significant growth setbacks. In APAC, monetary policy strategies vary, with Japan and Korea adjusting rates to support their respective economic circumstances.

Global economic forecasts

 

 

Source: abrdn January 2025, 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 December 2024, our abrdn multi-asset investments houseview further upgraded global real estate to “+2 overweight” (maximum score +4), owing to the clearer improvement in return performance in key markets. While fixed income and real estate investment trust (REIT) performance has been volatile in recent weeks, we remain confident in our expectation for an ongoing recovery in real estate total returns in Europe.

Market volatility and the global bond market tantrum were driven by multiple risk factors. As Trump's inauguration neared, fears of trade tariffs, inflationary policies, and uncertain foreign policy towards Greenland, Panama, Ukraine, and China unsettled investors. Meanwhile, low growth, high public debt and worries about fiscal policy pushed up long-term bond yields. Elections in France and Germany further added to the uncertainty in Europe's major economies. We have seen a cooling in market volatility in Europe since mid-January, and we believe inflation and interest rate cut expectations will return to drive short- and long-term interest rates in Europe.

Market momentum in European real estate continues. MSCI annualised European total returns increased to 0.7% in the third quarter of 2024. When the fourth quarter is reported, we expect a sharp increase in returns; a weak fourth quarter in 2023 will drop out of the data and a more positive quarter will be added in the fourth quarter of 2024. Indeed, Portugal, Netherlands, Sweden and Denmark all delivered total returns of more than 4% in the first three quarters of 2023. This compares with 3% for Continental Europe over this period. We expect full-year 2024 European returns to have reached 5%, representing stable capital values. 

We expect returns to improve further in 2025, as stable income returns are joined by modest capital growth. CBRE yield sheets in January 2025 show that 24% of markets are experiencing positive yield movements, with 72% being stable. All sectors and most regions are seeing improved capital market conditions, aside from poorer-quality offices. 
We see signs of bidding intensity emerging at the point of transaction. Green Street transaction price indices increased 0.2% quarter-on-quarter in December 2024, but by a stronger 1.2% in industrials and 0.9% in residential. Offices and retail are still seeing transactions below valuation, with offices falling 1.1% and retail 0.2% over the quarter. We believe the positive transaction pressure in industrial, core offices and residential property will feed into stronger valuations as the year progresses. 

Transaction volumes are now increasing too, reaching €50 billion in the fourth quarter and €175 billion over 2024. For the first time since June 2022, both annual and quarterly investment increased in December 2024. Greater transactional evidence should help price discovery and lead to better performance. 

An important feature that underpins our cyclical recovery thesis is ongoing rental growth in good-quality assets. European all-property rents increased by 4.1% over the year to September 2024, a slight moderation from 4.4% in June. Residential and logistics assets have outperformed, but rents have increased across all sectors. Low supply persists and new construction orders are falling at a steady pace. High construction costs, high development finance rates and tight labour markets mean we believe that nominal rental growth will beat inflation in 2025 and beyond. 

We have increased our European total return forecasts to 9.5% per annum over the next three years. And we have moderated growth expectations in some markets, given weaker economic growth forecasts. Netherlands, Spain, Denmark and Sweden are expected to outperform, while Ireland and Finland have been downgraded slightly and are expected to lag the recovery.  

UK real estate market overview

The UK real estate market recorded a positive total return of 3.4% over the first three quarters of the year, according to the MSCI Quarterly Index. Assuming the fourth quarter maintains this momentum, 2024 would be the first calendar year since 2021 to post positive returns. Capital values appear to have largely bottomed, with the favoured sectors, namely retail and industrial, returning to quarter-on-quarter growth over 2024. Reversionary potential is driving investment activity within the retail and industrial segments, and portfolio transactions dominate from an active listed sector. Wider economic and political events and construction impacts have added to tensions and delays, but the general consensus remains positive. 

Encouragingly, total returns increased for the third consecutive quarter, recording 1.5% over the third quarter of 2024. For the first time since June 2022, all sectors posted positive returns, led by the retail sector. Buoyed by a rebound in capital growth, the favoured sectors proved most popular once again, although offices are clearly slowing in their decline and are acting as less of a drag on the index.

Capital growth for all property was positive over the third quarter of 2024 at 0.3%. A combination of continued growth from the favoured retail (0.8%) and industrial (0.8%) sectors, and slower declines in the office sector (-0.7%), helped drive a positive overall figure. We expect to have seen the majority of capital value declines. Best-in-class assets in the favoured sectors are driving more aggressive pricing, while refurbishment and conversion activity for stranded assets are starting to make more sense.

Investment volumes surpassed £50 billion over 2024, according to Real Capital Analytics. Around 10% higher than the previous year, yet still 35% down on the 10-year average, investors remain cautious in their return to the market. Despite this, we have seen competitive bidding for best-in-class assets and those with reversionary potential. The buyer pool for long-income-producing assets remains shallow. But overseas capital has been active in acquiring portfolios within the hotel sector, given the strong growth fundamentals. Indeed, hotels had their strongest year for investment since 2018, with over £6 billion of recorded transactions.

APAC real estate market overview 

A slower-than-expected pace of interest-rate cuts suggests investors’ required returns and property yields could stay elevated for longer. This would translate into a more cautious outlook for capital returns over the longer term. This is especially relevant for property market/sectors in APAC, since repricing (ex-China) has generally lagged other regions and most property yield gaps are still tight relative to historical levels. 

Meanwhile, occupier fundamentals of selected markets/sectors have strengthened, which could underpin faster rental growth and mitigate the negative impact of a higher-for-longer rate environment.  

Our base case for a ‘K’-shaped recovery in the APAC property market remains intact, despite the prospect of a slower and shallower rate-cutting cycle. Growing bifurcation in occupier market fundamentals means bottom-up market and stock selection will remain key to investment performance. A higher-for-longer rate environment also remains constructive for private credit and secondary strategies. Within APAC, Japan and Korea are the top two markets where we have the highest conviction.  

The living sector ranks highly in our investment preferences globally. The investment case remains robust for Tokyo multifamily, backed by solid occupier fundamentals. Several tailwinds should 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).

Office occupier fundamentals in Tokyo and Seoul are also supporting rental growth. Prime-grade office vacancy rates in both cities are among the lowest globally, while the surge in construction costs will drag on new supply. In Tokyo, pre-leasing has been healthy for new projects scheduled for delivery in 2025. And leasing demand for newer buildings is expected to remain robust, as companies look to retain talent in a tight labour market. In Seoul, the start of the Bank of Korea‘s rate-cutting cycle has contributed to a faster-than-expected stabilisation in office property yields.

North American real estate market overview

We face a higher-for-longer scenario as the Trump administration gets underway and there is limited room for yield compression. Instead, returns will be driven by income returns and net-operating income (NOI) growth.

In this higher-for-longer environment, we are also expecting $500 billion of commercial real estate loan maturities, of which multifamily and offices make up a significant part. This could open more attractive entry opportunities in these two sectors, but investors should remain selective at a market and asset level. 

In general, we are most positive about the multifamily sector, as excess supply should be absorbed by mid-2025. Industrials should peak at a relatively low vacancy rate, but a reacceleration of rents will probably come only in 2026. Meanwhile, office performance will be highly dependent on market and asset quality.

For office spaces, job growth for office users is steady at around 1%, with little change expected in the near term. Property values are settling, which may lead to lower asking rates as new owners acquire buildings at discounts and can afford to charge less due to low occupancy rates. Nonetheless, there's an anticipation of office space rationalisation and more demolitions by 2025, suggesting a long-term adjustment in this sector. The East Coast is expected to perform better than the West Coast given supply constraints, with a preference for new-build offices with amenities driving market performance.

The industrial and logistics sector faces significant supply pressure, expected to ease only by the third quarter of 2025. The sector faced uncertainty given the International Longshoremen’s Association (ILA) negotiations and potential policy changes, causing occupiers to delay expansion plans. However, the resolution of ILA strike concerns and the trend towards nearshoring and reshoring, particularly in the upper Midwest, East Coast, and Gulf Coast, are positive signs. Industrial vacancy rates are expected to remain low, supporting rental growth into early 2026, though not to pre-Covid levels.

Retail space, particularly strip retail and lifestyle centres, is expected to perform well (despite recent store closures), with tight availability and quick occupancy of available spaces. Fast-growing cities in the Southern and South-Western US are likely to see better rental performance, while malls face increasing availability and differentiation based on asset quality. However, a potentially weaker consumer environment could challenge rental growth in the longer term.

The multifamily sector presents a mixed picture. High mortgage payments relative to rents are encouraging renting over buying, which is sustaining demand for rental properties. Construction starts for multifamily housing are significantly below peak levels, indicating tight vacancy rates, especially on the East Coast. Los Angeles is expected to see growth in NOI due to occupancy improvements. Looking ahead, a delayed supply response could accelerate rental growth into 2026, despite a modest outlook until mid-2025.

Global market summary – outlook for risk and performance

As we enter 2025, most overall real estate price corrections seem to have concluded. REITs and bond markets started the year with elevated volatility as global markets grew concerned about political headwinds, excessive public debt, and a weaker global growth backdrop. However, pressures have since eased and market volatility has dropped. 

Notably, real estate markets have generally displayed strong momentum, despite the nervous start to the year. Some sectors in the UK and Europe have seen values increase. The UK returned a healthy 7% in 2024, highlighting that with elevated yield levels, rental growth and yield impact can be quite modest and still support healthier overall total return performance. Returns in Europe are also turning a corner, with several markets expected to reach 6% returns over the year once the data is released. 

In December 2024, our abrdn multi-asset investments houseview further upgraded global real estate to “+2 overweight” (maximum score +4), owing to the clearer improvement in return performance in key markets. This indicates that an underweight allocation is no longer beneficial to multi-asset portfolios, especially in relation to cash returns of 4% to 4.5%. This is a significant call for an asset class that moves in and out of favour less frequently than more liquid asset classes.

Performance expectations vary by sector and region, with APAC lagging the path to recovery. Europe and the UK are now seeing positive capital value movements, with rental growth and yield impact beginning to push returns higher. 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, whichever region they are in.

We are more optimistic about sectors with strong fundamentals like logistics, residential, retail warehouses, and some alternative sectors. High-quality central office spaces are now performing well 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. The launch of DeepSeek has created some volatility, but it’s likely to trim data centre demand, rather than reverse the trend in the years ahead 

Expected returns are rising. We forecast a global all-property total return of 5.4% in 2025, with annualised returns of 7% 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.

Strategic outlook

Cycle

The market correction is nearing the latter phases of the cycle overall, and we expect conditions to improve further in 2025. UK, Europe and the US are leading the recovery, with APAC lagging. Our three core phases of this cycle remain in place but have become more nuanced:

Risk

- Geopolitics and macro uncertainties could delay the cycle, but it’s difficult to see it fully reversing in most regions. France and Germany are likely to be most at risk from weakening domestic conditions. 
- There is an upside risk to the outlook from faster rate cuts and macro resilience, although this has a modest probability.
- There is a downside risk from Trump’s trade tariffs and worsening geopolitical tensions. So far, there has been a stronger focus on domestic US politics than global trade relationships, but this could change imminently. 

Strategy

- Modest leasing and financial risk at this stage. Loan-to-value ratios below 40%.
- Focus on core assets for acquisitions in Europe and the UK as rates fall.  
- Value-add opportunities will come as core values recover and as liquidity in the market begins to increase.

Opportunities

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

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

Special situations
• Fewer in number as distress has reduced.
• Some ongoing redemptions offering interesting recapitalisation strategies or portfolio sales.
• Opportunities where refinancing fails.
• Developer insolvencies.

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.