The Prize – January 2025

In an industry where strategy loves a catchphrase – think “Beds, Sheds and Meds” – “Survive to ‘25” has been the mantra pursued by many over the past year. But with 2025 upon us, what strategy should investors now adopt as we plan for “Heaven in ‘27”?

Inevitably, the answer will depend on your perspective and objectives, and at turning points in the cycle these diverge more than ever.

Despite interest rates falling across the main markets, the economic outlooks couldn’t be more different. Growth in the US may initially benefit from a US First strategy that poses headwinds for others should tariffs rise. Political instability and high government debt in key Northern European countries has stimulated whisperings of stagflation, and the UK seems to be caught with higher interest rates to protect Sterling and low growth, driven by domestic uncertainty and weaker European demand.

In Switzerland, the domestic investor has experienced no real cycle, with values maintaining pre-Covid levels and interest rates recently halving to 50 basis points.  Contrast that with those who invested abroad and suffered values falling by more than 25%, with the impact compounded by a strengthening Swiss Franc. Looking forward, should Swiss investors double down domestically or seek markets in a cyclical trough?

Then there is the question of the best route to access the market – public or private markets, debt or equity, funds or direct, core or opportunistic?

Despite all this uncertainty there are good reasons to be positive:

• Occupier markets have remained robust for quality stock and locations
• New supply has been limited
• Economies have reopened and Covid dislocation is a fading memory
• Interest rates have peaked and property values have generally adjusted
• Investment underwriting is now easier and the coming vintages look promising

In our view, this is the time to build a robust, quality European portfolio.  Re-examine every asset in your current portfolio to ensure it justifies its role, invest your value-add capital in those properties that can be managed to core, prepare outliers for sale and recycle capital into true diversifiers.

Select sectors and assets that will benefit from strategic shifts, a rising TIDE of Technology, Infrastructure, Demographics and the Environment. 

Segment markets and target those with favourable supply-demand dynamics and barriers to entry.  Be conscious of occupier affordability, the costs of decarbonisation and the risks of regulatory change.

There are opportunities across the traditional sectors, even in those countries facing headwinds. In the UK, British Land is finding attractive investments in the retail warehouse market, LandSec is consolidating its holdings of the best regional malls and GPE is creating value in the central London office market.

However, as most investors dilute historic positions in the traditional retail and office sectors, we expect continued interest in specialist sectors such as student accommodation, data centres, hospitality and healthcare. Vibrant gateway cities possess an enduring attraction to students, tourists and businesses alike.

With existing supply often limited and operational requirements high, it will be those that can think creatively, build eco-systems and bridge the gap between institutional and entrepreneurial mindsets that will succeed in the specialist asset classes.

The economic and political uncertainty that remains as we enter 2025 will extend the trough of the cycle, but that creates an attractive window to acquire or build great assets for those willing and able to act. Just avoid the temptation to “Head to the sticks in ‘26”!