Real estate is past its lowest point for declining values and is at the start of a new cycle, but how entrenched recovery is and which sectors will benefit most will be dictated by a number of factors, M&G said this morning as it outlined its outlook for 2026.
Martin Towns, its global head of real estate, speaking at the global pension fund manager and institutional investment giant's offices at 10 Fenchurch Avenue in the City of London, said real estate is undoubtedly back on the agenda for asset allocators.
"That is thanks to values stabilising globally, with some pockets of growth." At the same time M&G says values remain close to cyclical lows, which Towns said means real estate is at an appealing entry point for global asset allocators.
"There is relative stability in inflation and interest rates. Global occupier markets are in pretty good shape with rental growth in certain areas. And capital raising was significantly up on 2024 last year. Europe is also firmly back on the agenda for this capital. The UK and Europe have been a bit unloved but that is changing. More Asian money is coming to Europe and more European money is staying here."
In addition, M&G says debt markets are increasingly supportive. The UK and Europe look particularly appealing as it is a "deep, diverse market" and there is value opportunity relative to other regions, with capital flows increasing for this reason. In addition more European "self-reliance spending", given the global geopolitical turmoil, could act as a stimulus.
Towns continued: "The structural change for retail, logistics and the office that caused [limited partners] to sit on the sidelines is changing. And there has not been a lot of construction happening. In offices we increasingly know where we stand in terms of demand and it is easier for investors to understand the opportunity for income growth where there has been a lack of supply because development has not been viable. The debt markets are more constructive too. With the cost of debt coming down we are likely to see more transactions happening. It feels like we are at the start of a new cycle. To see a more entrenched recovery we will need stronger GDP growth leading to stronger rental growth but we feel we are past the low point."
Towns said that in previous recoveries when investors came back they typically focused first on opportunistic and value-add strategies, but this time, capital is being split between core, core plus and value add at the same time. "This is driving core pan European strategies as it is a good time to enter."
Marc Reijnen, head of Europe real estate, said investment volumes across Europe had lifted by around €100 billion last year from that seen in 2023 to around €250 billion pointing to what he called a "timid recovery".
He broke down the top pick for opportunities for M&G as being led by residential, with 30% of that likely to be targeted at student housing where it sees undersupply. Next it is targeting the "resilient" industrial and logistics sector. The largest shift though in the market was leading to an increased focus on the improving retail and offices markets.
Reijnen said M&G was targeting grocery-anchored retail warehouses now but would likely be investing more strongly in the wider retail market and in offices in 2027. The institution is also focused on the hotels sector increasingly.
M&G also said there are opportunities for restructuring for managers with flexible capital.
'Occupational tension is back'
Peter Riley, head of capital solutions and UK commercial, said the UK had repriced further and faster than other Continental Europe markets and that was driving continued appetite from overseas investors, particularly for London given an absence of development. Riley said the industrial market had become more nuanced with location more and more important. "We are doubling down on core markets and on areas where supply has been lost to higher value uses. We continue to like multilet in urban locations."
Ruth Jackson, head of UK investment management, said retail was performing increasingly well, with its shopping centres at Manchester Arndale, Cribbs Causeway in Bristol and Bluewater in Kent all seeing occupancy and footfall up. Riley said the void rate at Cribbs Causeway was now at 0.4%. "Occupational tension is back."
Sally Hurst, director – debt strategy and origination, said beds and then sheds continued to top lender's wishlists but said there was an increasing willingness to lend to retail.
Towns said the group was looking at AI not only in terms of its immediate impact on demand for data centres but in terms of the potential long-term implications for where people will live and work. "It may be it leads to a continuation in the urbanisation of where people have their jobs, and so where they live. It may lead to improvements in science that mean people live longer. If so, will there be a rise in retirement communities."
Jackson said a key lesson learned in recent years was that occupiers increasingly wanted their buildings to be spaces where they are excited to be and proud to hold meetings. "The occupier needs a sense of excitement in a building's fabric and they need to be located near great amenity."
In terms of the latest threat of increased tariffs for European countries from the US, Towns reflected: "There has been a step change in the last six to nine months where investors are becoming used to a new normal. Two years ago that may have caused investors to pause but now they are more likely to say let's carry on given how quickly the news can change. People are increasingly used to uncertainty and we are not anticipating much impact on investment committee decisions. That said if it continues to escalate from here then that may change. But on top of this, real estate is looking good value compared to other asset classes that are perhaps more exposed to these issues."