Global economic outlook

Economic activity

In the US, economic activity is slowing due to elevated policy uncertainty and a decline in sentiment. Q1 GDP nowcasts point to a large contraction, and recession risk probability models are picking up. However, sentiment surveys have been unreliable, and technical factors appear to be overstating the extent of the underlying slowdown. The labour market is cooling but is not consistent with a downturn. In the Eurozone, weak near-term growth prospects are evident, with the rollover of labour markets in France and Germany pushing domestically generated inflation pressures down. Fiscal expansion, including increased defence spending and infrastructure investment in Germany, should boost growth in the medium term. China’s economic activity has been stronger than expected, with Q1 GDP expanding 5.4% year-over-year. Monthly activity data for March also surprised on the upside, helping key metrics post robust quarterly growth rates. However, the property sector continues to struggle, and the authorities may allow deflation to become embedded, blunting policy easing. Japan’s Q4 GDP was revised lower to 1.1% as consumption disappointed. Although nominal wage growth has improved significantly, real wages have deteriorated as food costs accelerated in recent months.

Inflation

US inflation is expected to rise due to higher costs and lower real incomes, tighter financial conditions, and uncertainty effects. The tariff shock is likely to push US growth lower and inflation higher. The Eurozone is experiencing disinflationary pressures due to weak near-term growth and the recent decline in energy commodity prices. The strengthening of the euro should keep a lid on goods inflation. However, fiscal expansion could push up inflation in the medium term if it is more aggressive and impactful than currently expected. Despite stronger-than-expected real GDP figures in China, there is little sign of a turnaround in whole-economy prices. The GDP deflator fell to -0.9% year-over-year, down from -0.6% in Q4 2024. Japan’s inflation is expected to remain subdued, with core inflation trends continuing given the weak near-term growth outlook.

Policy rates outlook

The US Federal Reserve (Fed) is expected to focus on securing a soft landing, with Chair Jerome Powell making clear the Fed would not welcome any further deterioration in the labour market. The outlook for Fed policy has become more uncertain following the election, but the growth and inflation data justify further rate cuts. The European Central Bank (ECB) is expected to reduce rates to 2.0% by September, with two-sided risks to this forecast. Fiscal expansion will likely keep policymakers more cautious, making the need for monetary accommodation less pressing. Cuts to the seven-day reverse repo rate and other policy rates in China are likely to support the economy as the trade shock unfolds. The authorities may condone a more substantial depreciation of the renminbi to complement other policy easing. The Bank of Japan (BoJ) is expected to continue slowly increasing interest rates, with the next hike anticipated in January.

Global economic forecasts

 

 

Source: Aberdeen April 2025. Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed, and actual events or results may differ materially

European real estate market overview

In March 2025, our Aberdeen multi-asset investments Houseview committee adjusted global real estate to a ‘+1 overweight’ recommendation (maximum score +4). While liquid assets – such as fixed income, equities and real estate investment trust performance – have been volatile in recent weeks, we remain confident of an ongoing recovery in direct real estate total returns in Europe. The downgrade to risk in the Houseview affected all asset classes, with cash weights increasing at the expense of risk positions.

While still positive, we acknowledge that the real estate backdrop has become riskier and relative pricing measures have become slightly less compelling in the last quarter. The volatility is evidenced by a sharp fall in global equity markets on the last day of the quarter, with the German DAX losing 2%. The real estate component of the DAX was the best-performing sector on the day. This highlights the sentiment behind real estate as a relative winner in a more benign economic environment. Since then, listed property companies have generally outperformed all equities. 

The equity market sell-off has coincided with lower bond yields, with the German bund having eased off a recent high of 2.9% to 2.5% at the time of writing. The level had briefly drifted to 2% at the start of the year, leaving real estate looking extremely cheap. However, following the 90-day pause on most tariffs and the focus on China, Europe currently looks better placed. Therefore, a balance of modest growth, gradual rate cuts, and easing inflation should leave European real estate looking better value.

Market momentum in European real estate is gathering pace. MSCI annualised European total returns increased to 4.8% [1] in 2024, the highest level since the second quarter of 2022. The fourth quarter of 2024 returned 1.8%, a notable increase from 1.4% in the third quarter and well above the long-term quarterly average return of 1.3%. Capital growth of 0.6% helped push total returns higher at the close of the year. The Netherlands, Portugal, Sweden, Spain and Denmark outperformed, as did the industrial, hotel and residential sectors. Indeed, some segments covered in the pan-European Pooled Fund Index hit double-digit returns in 2024, with Lisbon, Stockholm offices and Stockholm residential all clearing 10% [2]

The catalyst for improving returns has been a notable improvement in liquidity and capital markets. Investment volumes jumped by 46% [3] in the fourth quarter, compared with the same quarter of 2023; annual volumes were up 15% in 2024. This chimes with INREV’s quarterly Consensus Indicator, which showed liquidity and financing as the strongest drivers of improving sentiment since the middle of 2024. 

An important feature underpinning our cyclical recovery thesis is ongoing rental growth in good-quality assets. European all-property rents increased by 4% [4] over the year to December 2024, a slight moderation from 4.1% in September. Residential and logistics assets have outperformed, but rents have increased across all sectors. Low supply persists and new construction orders are falling at a steady pace. High construction costs, high development finance rates, and tight labour markets mean we believe that nominal rental growth will beat inflation in 2025 and beyond. 

UK real estate market overview

UK real estate achieved a healthy 8.1% [5] total return during the 12 months to February 2025, according to the MSCI Monthly Index. The favoured sectors of retail and industrial led the index, with the hotel and residential sectors also outperforming. Performance was driven by income returns, with a lack of yield compression across the market. All property capital values are healthily, moving into positive territory at 2.1%, primarily driven by robust rental growth. For context, over the year to February 2024, capital values experienced a 4.9% annual decline; and over the year to February 2023, values fell by 17%. 

Since income returns drove most of the performance last year, MSCI’s Quarterly Index – which is generally constructed of lower income-yielding assets – posted lower relative total returns of 5.5% [6] during 2024. The favoured sectors of retail and industrial both led the quarterly Index at 8.3%. Office returns were neutral over the year, as capital value declines slowed to -4.6%. Polarisation remains strongly in place, with best-in-class assets driving performance. 

Over 2024, it was a story of two halves for capital values. All Property gave -0.6% away over the first six months of the year but posted a gain of 0.4% over the following six months. Industrial and retail were the primary drivers, accelerating to 3.6% and 2.1% growth towards the end of 2024, respectively. Some yield compression was evident in prime assets within these segments. However, it was otherwise notably absent from the wider market, as investors waited for additional rate cuts. 

There is an outside possibility of capital values softening, as tariffs and trade escalations threaten global growth. As occupiers and investors hold back on decisions, sectors with higher availability rates like logistics and offices could be more exposed in certain submarkets. Additionally, discretionary-heavy sectors, including hotels and leisure, will likely see a pullback in demand, especially from international sources.

Investment volumes have taken a step back over the first three months of the year, as total transaction volumes fell 33% [7] year-on-year. Just £8 billion changed hands over the first quarter of 2025, down from nearly £20 billion over the previous three months. Initial uncertainty around macroeconomic and geopolitical tensions held volumes back over the first quarter. US tariff announcements will also ensure more investors sit on their hands in the short term. 

APAC real estate market overview 

Prior to the 2 April announcement, we had expected a ‘K-shaped’ recovery and bifurcation to expand not just between markets but also between different locations and grades within the same sector. While the negative growth shock is likely to dampen the overall leasing demand, tenants’ flight to quality/location is expected to continue, especially as negotiating power shifts towards the tenants. 

In APAC, we have the highest investment conviction in Japan and Korea, and the latest tariffs have not changed that assessment. In fact, we expect incremental investment capital to favour lower-risk core markets like Japan and Korea amid the prevailing uncertainties. A slower pace of interest rate normalisation in Japan and faster policy easing in Korea will also support capital values, even as prospective rental growth slows. Finally, we think there’s also a good chance that tariff rates for both markets could be negotiated lower over time.  

The living sector ranks highly in our investment preferences globally. We believe the investment case remains robust for Tokyo multifamily, despite the potential economic slowdown because of the tariffs. The overall vacancy rate was relatively tight to begin with, and trends underpinning residential leasing demand – such as net migration, improved wage growth and increased female labour participation/dual-income households – will likely endure despite the near-term uncertainties.

Office occupier fundamentals in Tokyo and Seoul are also likely to withstand the near-term negative growth shock, with vacancy rates in both cities among the lowest globally. In Tokyo, while new office supply is scheduled to rise again in 2025, pre-leasing has been healthy for the major developments in the pipeline. Leasing demand for newer buildings is expected to remain robust as companies look to retain talent in a tight labour market. 

While some investors are concerned about the significant new supply that could be delivered from 2028 in Seoul, we think there are potential mitigating factors. Demand for advanced technologies should endure despite the near-term uncertainties. Korea remains at the forefront of the global technology upcycle, which should, in turn, underpin office space demand over the longer term.  

North American real estate market outlook

Tariffs are a prominent downside risk on demand, which, coupled with faltering consumer confidence, may affect the US real estate market. Industrial vacancy rates are projected to peak at a relatively low level in 2025, which could support a re-acceleration in rental growth once availability begins to tighten again in early 2026. However, rental growth is not expected to return to pre-Covid levels.

In the retail sector, the US consumer backdrop is slowing, with serious credit card crime notably above its long-term average. January marked the first month in over a year since consumer spending experienced a monthly pullback. Additionally, the number of store-closures this year is expected to double from 2024. These conditions suggest a significant variation in rental performance in the year ahead. Fast-growing cities in the southern and southwestern regions of the US, and smaller spaces along primary corridors, are expected to outperform. Rental spreads on spaces leased for five or more years should remain at decade-highs during this year. Conversely, the availability of malls should continue to rise for the foreseeable future, making asset quality a crucial differentiator in mall performance. Overall, the weakening consumer backdrop and shallower tenant demand may limit retail rental growth in the near term.

The multifamily housing sector also faces notable changes. By mid-2025, multifamily construction starts are expected to be 74% below their 2021 peak and 30% below their pre-pandemic average. Despite this, demand for east-coast hubs is expected to remain strong, thanks to high barriers to homeownership and limited supply numbers, keeping vacancy rates relatively tight. Los Angeles apartments should experience growth in net-operating income due to occupancy improvements following recent fires, and the muted supply background has allowed sunbelt markets to absorb excess vacancy.

Demand in the multifamily sector is likely to remain robust, as renter affordability has improved, and a higher interest-rate environment hinders renters from transitioning to homeownership. This translates into a relatively modest outlook until mid-2025. A delayed supply response is anticipated due to the current higher-for-longer environment, with increased construction lead times for multifamily developments. As a result, rental growth is expected to see some acceleration as we head into 2026.

Overall, the US real estate market is characterised by a diverse and evolving landscape. Industrial sectors show promise for rental growth recovery, while retail faces challenges from a slowing consumer backdrop and increasing store closures. Multifamily housing remains resilient, with strong demand in key regions despite significant drops in construction starts. The interplay of these factors will shape the real estate market's trajectory in the coming years, highlighting the importance of adaptability and strategic planning for investors and stakeholders.

Strategic outlook and performance

The recent economic and financial market upheaval stemming from trade tariffs has had a material impact on risk across markets. This is particularly the case for the US and China, while the rest of the world is likely to experience weaker-than-expected performance. We had trimmed our forecasts to reflect a weighted average US tariff rate of around 20%. At the time of writing, it is currently around 23% [8], but with a much narrower focus on China and less on the rest of the world. However, the situation is fluid, and we are therefore not revising our current forecasts until the final position on tariffs becomes clearer. Instead, we are signalling greater risks to the outlook and a lower probability attributed to our base case. 

Cycle

Tariffs pose a threat to the expected market recovery. The global real estate market was experiencing an improvement in returns in the first quarter, but economic risks and weaker overall sentiment have put that at risk. However, trade negotiations are ongoing and there is significant risk of further policy shifts in either direction. As a result, we are still advocating that real estate is sitting ready for an uneven improvement in performance. The UK and Europe appear to be ahead of the curve, with the US likely to lag. Lower interest rates in Europe and the UK are set to help facilitate the recovery there. 

Risk

Geopolitics and macroeconomic uncertainties could delay the cycle and pose the largest risk to our forecasts. The US and China are most exposed while the UK is well positioned.  

There is an upside risk to the outlook from faster rate cuts and macro resilience, although this has a modest probability. 

A possible spike in inflation, induced by tariffs, would be damaging to the outlook for gradual rate reductions across most economies.

Hotels, retail and logistics are likely to be more exposed to a weaker scenario in the US. Meanwhile, office rents are highly correlated to the stock market in many cities and could suffer if ongoing financial market volatility continues.

Strategy

Given these risks, our current strategic guidelines for our funds emphasize a cautious approach to risk exposure and investment strategy. We recommend overweight allocations to sectors with strong operational fundamentals and rental trends, such as rented residential, student accommodation, defensive retail warehousing, core offices, and alternative segments like data centres. These sectors are expected to perform well due to their resilience and ability to generate stable income returns. We also advise maintaining a diversified portfolio to mitigate risks and enhance returns. By focusing on high-quality assets and adopting a long-term investment horizon, we aim to navigate the uncertainties and capitalise on the opportunities within the global real estate market.

Opportunities 

Core/ core+/specialist diversified strategies
• Cyclically, we are still at the base of the capital market cycle, with an extended period ahead for entering at an opportune time. 
• Living sectors, defensive retail such as supermarkets and grocery-anchored retail parks are the preferred sectors. We remain positive on logistics but are currently waiting to see how tariff negotiations play out. 

Value-add strategies
• Secondary market needs to correct more. Exit pricing is the key, but we’re in no rush to commit.
• Office value-add assets where entry yield is more than 7% and location/amenities are strong, plus redevelopment if yields are more than 10%.
• Logistics asset repositioning and supply chain reconfiguration are likely to offer interesting higher risk and reward opportunities. 

Special situations
• Secondaries strategies look appealing in relation to a shortage of liquidity in some real estate funds. 
• Specific ongoing redemptions offering interesting recapitalisation strategies or portfolio sales.
• Opportunities where refinancing fails.
• Developer insolvencies.

Global market risk

The Aberdeen Global Risk Navigator  measures the comparable risk of implementing a direct real estate strategy across individual or multiple jurisdictions globally. Lower scores indicate lower risk to the expected outcome. It uses nine sources from our proprietary research, in-house data, and external sources. It has a 50% weighting to environmental, social and governance (ESG) metrics, including measures of climate policy, vulnerability to climate change, social stability, and the strength of governance. This gives our Global Risk Navigator a strong link to emerging physical climate and transition risks, while also using more traditional risk measures, such as liquidity, transparency, and market size. 

As a mature and relatively transparent market, Europe typically has the lowest country risk scores, with France, Germany and the UK leading the global ranking. The Nordics generally score well on ESG measures, but market size and liquidity risks can weigh on their overall scores. The US has fallen down our overall ranking since the introduction of a greater weight to the five ESG factors. APAC has a widespread in scores across the region, with countries affected by lower transparency, market size, climate risk, and economic risk. More developed APAC economies, such as Japan and Australia, have lower risk scores than emerging economies.