Maarten van der Spek: Real estate, tomorrow's forgotten winner
Maarten van der Spek: Real estate, tomorrow's forgotten winner
This column was originally written in Dutch. This is an English translation.
By Maarten van der Spek
Private equity and private credit in particular are flourishing, boosted by recent successes. Real estate has done poorly, but is worth considering based on the outlook.
David Lebovitz of J.P. Morgan recently predicted that over the next ten years, the return on real estate could well exceed that of private equity (source: PERE, 13/11/24). Various indicators support this assumption and indeed point to a stronger performance of real estate. Private equity has achieved exceptional returns over the past decade, well above the historical average.
Moreover, research has shown that future private equity returns are negatively correlated with capital inflow. And since the influx of capital into private equity has been exceptionally high in recent years (although 2024 has already shown a clear weakening), a normalisation of returns is very likely. Real estate, on the other hand, has recently gone through a difficult period, mainly due to interest rate increases and declines in value. It is precisely this dip that creates interesting opportunities.
Private equity bubble?
The real estate sector has recently undergone a painful but necessary correction to align with the current higher interest rates. The result? Investors can now acquire high-quality real estate at attractive prices. Private equity, on the other hand, has not yet undergone a comparable revaluation.
There are also several red flags that indicate valuations in private equity may be too high. The fact that even celebrities are setting up their own funds (Kim Kardashian, Jay-Z) is a telling sign. In addition, PE funds are struggling with a growing exit problem due to high interest rates. Due to artificially high valuations, sales can only be made at disappointing prices. To avoid lower returns, many funds are postponing exits. Finally, there are also more and more examples of private equity having a negative impact on society (fire trucks not working in LA, medical costs rising due to PE), which does not exactly improve its image.
Robust real estate outlook
These market signals are playing out against a complex macro-economic backdrop. With inflation persisting and political tensions high, it seems likely that interest rates will remain high for some time. While this presents a challenge for private equity, the real estate sector has long since adjusted to this new normal. The fundamentals of real estate are also solid: with the exception of a few office markets, vacancy rates are low, while new construction has been limited in recent years due to market conditions. This combination creates room for inflation-driven rent growth, which is a very attractive prospect for investors.
Private equity, on the other hand, is facing a challenging period. The exceptional returns of the past have created sky-high expectations that are becoming increasingly difficult to realise. The first signs of levelling off in returns are already visible. It is becoming particularly tense for funds that are approaching their end date: realising exits in a high-interest-rate environment is becoming a complex task.
The right balance within alternatives
The current fixation of institutional investors on private equity and private credit is understandable, given their impressive track record. But successful investors look beyond recent performance. The combination of corrected valuations, solid fundamentals and a limited supply of real estate offers excellent opportunities, especially now. Whereas private equity was the winner of the previous decade, real estate seems ready for a comeback. The crucial question is not whether, but which investors will have the courage to swim against the tide and reap the rewards later.