Our outlook for 2024 is that listed real estate should outperform the broader equities market, again because of its sensitivity to interest rates (this time on the upside). We have already started seeing this outperformance in November and December. We might however experience a near term correction if the Fed does not cut rates in March, as markets are now pricing. This would be a good time to entry or top up positions.Image_2024-01-08_08-07-45.pngMoving on to US markets, the following chart compares listed and unlisted real estate with fixed income. What we notice is that over the long period listed and unlisted real estate tend to generate similar returns outperforming fixed income, however listed real estate reacts more abruptly to lack of liquidity underperforming drastically private real estate. A similar scenario took place in 2007-2008, in 2020 and more recently in 2022. The good news is that after these drawdowns, listed real estate performs strongly and corrects the underperformance, if though private real estate continue to decline. This observation leads us to the conclusion that listed real estate will outperform private real estate this year, as it has happened during November and December last year, where we have seen some REITs rallying 30-40%. Image_2024-01-08_08-19-26.pngThe following chart introduces two non-listed real estate indexes of Offices and Industrial into our analysis. What we notice is that, even within the real estate sector there are strong performance variations, and it is possible to generate outperformance in private markets by selecting the right sector. Our view is that Offices will continue to underperform, and we will stay away from this asset class even though yields might start appearing interesting. There are secular forces reducing demand of offices in the US and Europe, which will continue to push down capital values across the sector. Only select properties with exceptional ESG standards and locations will see rents and capital value grow. Rather than trying to pick these unicorns we will use listed real estate to invest in the Office sector.Conversely, we think that the Industrial will continue to experience positive tailwinds because of the continue growth of e-commerce and the need of reshaping supply chains. It is for this reason that we have just initiated the development of a logistics warehouse in the Netherlands which we expect will deliver a double digit IRR when it will delivered in 2025. Image_2024-01-08_08-22-59.pngAnother sector where we have decided to invest is the UK Residential Sector. The chart below shows the remarkable performance of this asset class over a long period of time, representing an excellent store of value for investors who wish to allocate a portion of their portfolio to GBP assets.Our focus will be primarily the Built to Rent and Serviced Apartment sectors, with acquisitions planned in both London and Manchester. Image_2024-01-08_08-28-30.pngMoving to the relationship between interest rates and real estate, I am sharing a chart I took from a presentation I attended last month, showing the interplay between interest rates and rental yields in the UK property market (but the same can be repeated in other markets). Essentially, the chart shows that even when interest rates were higher than rental yields (Phase 1), it still makes sense to use a moderate amount of leverage because of growth (in this case approximated by Income Growth). Phase 3 in the chart was a very unusual scenario when interest rates were kept artificially low and leverage was able to boost both income and growth. The current Phase 4 is more similar to Phase 2 when interest rates will be approximately equal to rental yields. In this phase, leverage is not accretive to income, but still boosts growth. The conclusion we draw from this analysis, is that caution should be used in the use of leverage when investing in real estate both for income generating properties and development projects. Image_2024-01-08_08-32-09.pngThe following two charts provide precise return forecasts for European and UK property markets.In the case of European markets a 5 years projection is provided (including one with a notional 40% leverage). As you can see, expectations over the next 12 months are muted for European real estate because income is more than offset by capital declines. However returns are expected to be quite strong for the rest of the forecast horizon.For the UK, a positive return is expected already in 2024, given that this market corrected substantially during 2022 and 2023Image_2024-01-08_08-40-52.pngImage_2024-01-08_08-41-04.png

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A boutique development of 14 residential apartments located in the prestigious legal district in Central London.

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