Finding global real estate opportunities for Australian investors

Despite a strong macroeconomic environment, rising interest rates have proven challenging for real estate over the past two years. Though we remain cautiously optimistic, the global economic outlook over the next 12 months has become challenged because of rising policy uncertainty in the US and weaker growth across Europe and Asia. While markets had priced in the potential for additional rate cuts in 2025, the probability of materially lower policy rates is in question due to stickier inflationary trends. The Federal Reserve has adopted a more conservative approach to additional interest rate cuts as it evaluates data on prices and economic growth.

Within this increasingly challenging environment, our global team of more than 300 real-estate investment professionals has used their long experience and over 65 years of knowledge and experience of the market to focus on resilient subsectors supported by robust long-term structural trends rather than cyclical forces.

A collective thirst for data drives demand for data centers

Data centers are one of the pillars upon which our modern, knowledge-based society rests. The past decade has seen the migration to cloud computing drive the first wave of growth in data storage capacity. Our team of data center investment specialists believe a second wave of expansion is being driven by the artificial intelligence (Al) revolution, creating increased demand for capacity across North America, Europe, and the Asia-Pacific region.

The amount of digital data expected to be created over the next five years will be more than double the amount of data created since digital storage was first invented in 1956. At the same time, this highly specialized asset class requires expertise in site selection, power availability, and equipment-characteristics that represent high barriers to entry and limit the growth of supply. In the US, rising land prices, longer lead times for power and equipment, and labor shortages are all driving up construction costs and further dampening supply.

US core-plus private equity real estate

Since central banks began raising interest rates in 2022 to combat inflation, commercial real estate capital markets have faced significant headwinds, prompting investors to re-evaluate their portfolio strategies. While we believe the private equity real estate market has reached an inflection point and is poised for a rebound in transaction activity, the prospect of slower economic growth could continue to present challenges.

That said, we remain confident in the relative attractiveness of private equity real estate, particularly given the markdowns already absorbed by the market. In the absence of a recession, which would weigh on demand and investor sentiment, core-plus strategies appear well-positioned. Credit spreads have begun to widen modestly, but debt capital remains accessible, and investor sentiment has improved notably compared to a year ago.

We expect commercial real estate investors will increasingly re-engage across a broader risk spectrum, taking advantage of more opportunistic pricing as the global recovery unfolds. While economic headwinds remain, a backdrop of sustained growth, more accommodative monetary policy, and significant repricing in real estate markets could generate compelling returns for core-plus portfolios through a combination of strong income and value appreciation.

As Todd White, managing director of portfolio management notes, the asset class's historical performance suggests that as interest rates begin to decline, a prolonged period of positive returns is likely to take hold, particularly benefiting investors in core-plus strategies beginning in 2025.

Opportunity knocks in European hotels

The European hotel sector benefited from surging demand in 2023 and 2024 as the travel and tourism industry bounced back from COVID-19. Looking ahead, we anticipate that steady growth will continue, albeit at a more moderate pace, underpinned by greater global mobility, the rise of the middle classes in developing countries, and a mounting desire to devote more time to leisure activities and memorable experiences. It is notable that demand has outpaced supply growth in Europe for a prolonged period, creating structural strength in the hotel operating environment. Whilst current economic uncertainty, driven by the new tariff regime imposed by the US administration, may weigh on demand, this could be offset by a diversion of travelers towards Europe instead of the US. Thus, under current conditions, we do not see significant evidence to alter our outlook.

At the same time, "the structure of the industry in Europe is creating favorable opportunities for acquisition and repositioning," says Graeme McCormack, head of hotel fund management. He explains that this is because independent hotels account for the majority of rooms in Europe, whereas hotel chains have a much higher penetration rate in the US. Yet, while many of these independent properties are very well located, they have suffered from years of underinvestment due to their ownership structure, which tends to be smaller groups or families which own one or two hotels. In 2021, for example, while independent, family-owned properties accounted for 57% of rooms in the European hotel industry, they received only 36% of total investment.

Currently, there is an opportunity to acquire these hotels at a discount, as two years of high inflation and elevated borrowing costs have further strained financial weaknesses initially caused by the COVID-19 travel shutdowns.

Graeme also notes that the strong performance of leisure and hospitality across southern European countries in particular is already attracting the attention of investors and global brands, especially in the luxury and economy segments.

REITs: A resilient play amid global market uncertainty

Global REITs are relatively well-positioned compared to broader equity markets as trade tensions escalate and signs of slowing US economic growth emerge. We believe REIT earnings are largely insulated from the direct impact of tariffs and other adverse policy developments, supported by strong balance sheets and durable income streams.

In this environment, REITs offer investors a defensive rotation opportunity. Their relatively durable income profile and inexpensive valuations has helped them outperform both the S&P 500 Index and NASDAQ Index year-to-date in 2025. Additionally, REITs provide meaningful diversification benefits, with a favorable sector exposure and a long-term return profile driven by underlying real estate fundamentals.

Importantly, global REITs may also serve as a partial hedge against potential de-risking by foreign investors and growing recession risks in the US.

Within the REIT universe, we currently favor sectors with strong secular tailwinds, including senior housing, single-family rental, and wireless towers, given their structural demand drivers and earnings resilience.