2024 was a year of recovery, with GDP rising across most countries and inflation moderating, albeit remaining volatile. Ultimately, the much hoped-for soft landing was achieved. This is particularly true for the US, where recession fears spiked around 2Q24 due to unemployment rates creeping up slightly. However, GDP growth was strong from 2Q24 onwards and the US subsequently avoided recession. Inflation ticked back up in many countries towards the end of the year, though it remained below 3%. Central banks around the world started to cut interest rates from the high levels they had reached to counter the post-pandemic inflation. The Bank of Japan was an exception, ending its negative interest rate policy and raising its policy rate to around 0.25% in July, the largest hike since February 2007.
This backdrop marked improved conditions for real estate markets. According to MSCI data and after adjusting for seasonal effects, global real estate transaction volumes were on a slow upward trend in 2024, having bottomed out in 4Q23. Compared to 2023, global all property investment volumes increased 14% YoY to USD 691 billion for 2024 overall, with most sectors and geographies showing improvements towards the end of the year, though remaining well down from peak activity in 4Q21. Price adjustment in global real estate capital values continued in the first and second quarters of the year, though the pace of decline eased. According to MSCI data, global capital values bottomed out in 3Q24 and were down 2.4% for the year as a whole. In the second half of the year, capital values mostly rose or were flat across the residential, retail and industrial sectors, whereas office values saw further significant value declines. NCREIF reported US all property capital values down 4.2% for 2024 as whole, while MSCI reported UK all property capital values up 0.5%, Europe capital values up 0.2% and Japan capital values up 0.6%.
The residential sector benefited from greater investor confidence as market expectations for policy rates stabilized and the downward trajectory in policy rates pushed mortgage rates to follow the same path. Within the office market, the stark difference between market-leading properties, with features that occupiers desire, and the rest, persisted. Retail faced some challenges early in the year but ultimately rebounded, with weaker consumer confidence initially dampening demand in some countries, while inflationary pressures eased. The industrial sector has benefitted from the reshoring of manufacturing and e-commerce growth, which has supported demand for warehouses and third-party logistics.
Global real estate returns improved in 2024, following a sharp slowdown in 2023. According to the MSCI, global all property total returns were 2.0% in local currency terms for 2024 as a whole versus, a negative return of -4.3% in 2023, with a capital value decline in 2024 of -2.4% and an income return of 4.5%. There were significant differences between real estate sectors though. Office was the weakest sector, with a negative global total return of -2.4%. By contrast, the other sectors were stronger, with residential recording a total return of 3.1% and industrial a total return of 3.9%, while retail and hotels recorded the strongest performances, with total returns of 5.3% and 6.5% respectively.
Moving into 2025, the global economy and financial markets experienced new turbulence as the Trump administration took office in the US, announcing large and wide-ranging tariffs on US imports. It is unclear at what level the tariffs will end, which will depend on negotiations between the US and its trading partners. The impact on real estate markets will depend on how the tariffs affect the economy, for occupier demand, and interest rates for capital markets. However, we think that residential looks the most resilient and defensive sector, supported by strong fundamental demand and housing shortages. Overall, real estate investors are likely to take some pause as they assess the tariffs, though we still expect global real estate returns to accelerate and be positive in 2025.
