The evolving landscape of commercial real estate (CRE) requires long-term investment strategies that take into account significant global forces that can reshape economies and property markets. These forces, often referred to as megatrends, drive technological innovations, transform societies, and alter the investment environment. Our recently launched Commercial Real Estate Megatrend Resilience Index examines the impact of four key megatrends—demographics, technology, geopolitics, and climate—on the future of CRE.
When creating this index, it was essential to consider the ways in which these megatrends interact. They rarely exist independently but often intersect and even conflict, presenting challenges for investors. A prime example is the situation in Florida, a popular retirement destination due to its ageing baby boomer population. However, the state has seen a sharp rise in insurance costs, driven by climate change, which has affected the financial returns that were initially expected.
The index evaluates the resilience of CRE markets in various locations against these four megatrends, looking ahead to 2050. Each property market is scored from 0 (least favourable) to 100 (most favourable), covering five property sectors. This comprehensive approach provides a clear picture of long-term prospects in key CRE markets. Our findings show that advanced economies are generally better positioned to handle these megatrends. Australia, Singapore, and the UK top the list, each with specific strengths. Australia ranks highest overall, benefitting from robust demographics and favourable geopolitical conditions, although it faces challenges due to high climate transition risks stemming from the need for decarbonisation.
The index also analyses individual property sectors, identifying the most resilient based on relevant drivers. Residential property emerges as the most favourable sector when considering these megatrends, followed by industrial, hotels, and retail. Offices are the least favourable, although some markets still show promise.
In the residential sector, the primary advantages stem from strong demographics and productivity growth. In countries with a balanced exposure to generative AI and readiness to adopt AI, long-term productivity is expected to rise. This leads to higher wages, which ultimately benefits the housing market. Additionally, factors such as population growth, societal shifts towards smaller households, and urbanisation contribute to the positive outlook for residential markets. Sweden, the UK, and Finland are the top performers in this sector.
The industrial sector also benefits from favourable conditions, especially in countries with large or growing populations. A larger domestic market drives demand for goods and changes consumption patterns, while a strong labour force supports increased production capacity. Technological advancements, particularly in e-commerce, are significant in wealthy consumer markets like the US and the UK, as supply chains become more localised. The re-shoring of manufacturing and the development of digital and energy infrastructure also drive demand for industrial properties. In terms of climate, industrial properties are relatively low-risk due to lower energy intensity and renovation costs, along with the potential to integrate renewable energy. Singapore, the UK, and Australia are the top markets in this sector.
The hotel sector benefits from economies with strong digital infrastructure and innovative workforces, which boost productivity in accommodation and food services. This has become more apparent as digital platforms and social media make travel planning easier. Demographics also play a role, as rising global incomes in emerging markets increase tourism demand, while ageing populations in advanced economies create a growing consumer base with disposable income and time to spend. Australia, Malaysia, and the UK lead the hotel market in terms of resilience.
Retail is another sector driven by demographics, particularly population growth and rising incomes. Countries like Australia, Sweden, and Malaysia show strong growth potential, while markets such as Sweden, Singapore, and the US, with higher incomes, are well-positioned for the future. In emerging economies, the expanding middle class is shifting towards higher-value goods, further boosting the retail sector. Australia, Sweden, and Singapore are the top retail markets.
Finally, the office sector remains the least attractive in the Megatrend Resilience Index, although some countries are better positioned than others. Markets with growing working-age populations are more favourable, although only seven out of the 25 countries in the index are expected to experience such growth. The top office markets benefit from advances in technology, particularly generative AI, which has the potential to enhance productivity in office-using occupations. Countries with high readiness for AI implementation, particularly in financial and business services, could see a boost in output without significant labour market disruption. Australia, Singapore, and the US are the leading office markets.
This analysis of megatrends highlights how critical it is for CRE investors to understand and adapt to the shifting dynamics driven by demographics, technology, geopolitics, and climate. Advanced economies, particularly those with strong property sectors, will likely fare better in the long run.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
