Market Insights: Liam Bailey, Global Head of Research at Knight Frank provides an overview on the current Real Estate investment landscape and what to expect in 2024

As a part of REDD's investment series, we interviewed Liam Bailey to gain his perspective on the present property and wealth landscape. Liam provided an exclusive overview of the influence of interest rates on average annual prices and the potential resurgence in demand. Additionally, he delves into what the property market and wealth creation might have in store for 2024.

The 15 December 2021 marked the beginning of a shift in the investment landscape, with The Bank of England being the first major central bank to raise interest rates after the pandemic era cuts.

The shift was followed by a steady ratcheting of rates around the world as economies struggled with surging inflation. For investors the shift proved monumental - asset values in many markets were undermined and a new way of weighing opportunities has been required. Investing in real estate now requires a much more thoughtful approach. Less than two years ago an investor could borrow at a little more than one per cent to buy a property and receive a return of three or four per cent. Now cash sitting in the bank or invested in government bonds is paying comparable or better returns.

Yes rates will likely come down from today's levels - but ageing populations, fractious geopolitics and the hugely expensive energy transition will coalesce to keep borrowing costs elevated in the longer term.

For now, prime housing markets are proving resilient despite higher interest rates. Many markets were given a shot in the arm by signs that the Federal Reserve, Bank of England and the European Central Bank may be at or approaching the end of their tightening cycles. Average annual prices rose 2.1% during the year to September across the 46 markets covered by the Knight Frank Prime Global Cities Index, which is the strongest rate of growth since Q3 2022. The revival in demand may be welcomed by property owners but could be pushed off course if inflation surprises on the upside.

The Federal Reserve in particular faces an economy still growing at a rate of almost 5% with only a few tentative signs of cooling. In choosing to hold the Federal Funds Rate in a target range of 5.25%-5.5% last month, Fed chair Jerome Powell cited higher long term borrowing costs as a potential substitute for further hikes. Treasury yields promptly fell on what investors interpreted as a more dovish outlook, which to some extent neutralised Powell's logic for holding in the first place.

Whatever happens to inflation in the coming months, a more sustained upswing in demand and prime home values will only be achieved once interest rates begin to move lower – which is unlikely to take place before mid-2024. While asset markets, including property, will see a more sober assessment of opportunities from investors the outlook for wealth creation remains upbeat.

Despite the risk of recession in several developed economies over the next 12-months, the global economy will still deliver positive growth through this year and next. Our expectation that the number of UHNWIs will increase by 28% globally in the five years to 2027 remains unchanged and points to a growth in demand for luxury assets and property over the medium term.

By Liam Bailey, Global Head of Research at Knight Frank