What are the main themes in global real estate right now?

Global real estate has gained 10.4% year-to-date, underperforming broader equities by 4.6%, with performance sharply bifurcated by region and sector. Asia, led by Japan and Australia, significantly outperformed due to capital inflows and improving fundamentals, while Europe and Hong Kong lagged amid office sector weakness, funding pressures, and rising vacancies. Expectations of rate cuts and an improving earnings outlook (7.3% EPS growth for 2024-25) are supporting the sector, with U.S. REITs fairly valued and global listed real estate trading at a 10% discount to NAV, highlighting a focus on prime assets and the growing influence of private REITs in China.

Analysis

Global real estate has generated a 10.4% return year-to-date in 2025, yet underperformed the broader equity market by 4.6%, with performance characterized by significant regional divergence. The Asian market has been the primary driver of gains, led by Japan, which has experienced a surge in overseas capital inflows into its residential sector, and Australia, which was upgraded to overweight by UBS due to falling rates and signs of a valuation trough. In contrast, European real estate has lagged, particularly in the office sector in London and Stockholm, due to funding pressures and rising vacancies in secondary assets. Similarly, Hong Kong remains under pressure from high funding costs and a sharp drop in retail sales. In the U.S., REITs are considered fairly valued, though high-beta segments like regional malls and lodging have posted double-digit gains on optimism around potential Federal Reserve rate cuts, and brokers such as JLL, Cushman, and CBRE have rallied on strong earnings. Sector-wise, crowding data indicates data centers and infrastructure are heavily long positions, while offices are heavily shorted. Despite a recent rally driven by multiple expansion rather than significant earnings upgrades, the global sector trades at a 10% discount to net asset value (NAV), consistent with historical levels, and the earnings outlook has improved, with a projected EPS growth of 7.3% for 2024-25.

Key Decisions for Investors

• Consider overweighting Asia-Pacific real estate exposure, focusing on Japan's residential market and Australian REITs, which benefit from strong capital flows and improving fundamental outlooks.
• Exercise caution with European real estate, particularly REITs with significant exposure to secondary office assets, and remain underweight on Hong Kong landlords due to persistent funding cost pressures.
• In the U.S., selectively target real estate service firms like JLL and CBRE that are capitalizing on increased transactional activity, while recognizing that broad U.S. REITs are currently viewed as fairly valued.
• Monitor for a potential policy shift in Tokyo, as proposed cooling measures to curb speculative foreign buying could impact the recent strong performance of the Japanese market.