Savills : Will the 2020s be the decade of real estate?

Behind us lies the decade with the lowest interest rates in recent history. For example, between 2010 and 2019, the key interest rate averaged 0.4 per cent in the Eurozone. The boom that this has triggered for the real estate investment markets and in Germany in particular is well known.

We now have a decade ahead of us in which interest rates could be even lower. Against this background, we expect that multi-asset investors and others will continue reducing their bond ratio even further, amongst others, in favour of real estate.

In fact, some investors have long regarded real estate as a substitute to bonds and, given a global market volume of around US$100 trillion, they are now looking at the real estate market as an alternative to bonds altogether. Even a small shift from bonds to real estate would lead to enormous additional liquidity in the market.

While demand is rising, willingness to sell real estate assets is dropping for the same reasons. Consequently, initial real estate yields in most sectors will continue to decline. Although they are already at record low levels in absolute terms, the risk premium over the respective 10-year government bond yields remains unusually high in many countries. In Germany, for example, the risk premium for top office properties is an impressive 340 basis points.

By way of comparison, the average premium over the last 20 years was only around 220 basis points, and the average over the last 30 years was only 120 basis points. It is possible that the premium is currently so high because the capital market players always had an interest rate turnaround scenario in mind until the outbreak of the Covid-19 crisis and expected the risk premium to disappear as bond yields rose.

This scenario is, at least for the near future, off the table and the premium should reduce once the crisis has been overcome. It is already noticeable that peak yields in many segments have hardly been affected by the crisis.

Towards the end of the 2020s, perhaps even earlier, the risk premium of real estate could fall for a completely different reason. There are already properties, for example in Switzerland and parts of Asia, that can be traded digitally as tokens. They show a future in which real estate, or even the smallest shares of it, can be traded in real time similar to shares and bonds, fully automated if necessary. This will not only eliminate the risk premium for real estate linked to liquidity, but will also lead to a strong increase in transaction volumes.

The transaction records that we have marvelled at in recent years may appear small in comparison in 10 years' time.

Further information

Contact Matthias Pink

Contact Savills Germany Research