2024 Global Real Estate Outlook

Speaker 1: Perhaps no other asset class was impacted as much over the last 12 months by both cyclical and structural changes than commercial real estate. But what lies ahead for 2024? Will higher interest rates continue to bite? Will valuations come more into focus? And might we even see the very definition of core real estate evolve? Welcome to the Barings 2024 Global Real Estate Outlook where our experts across the US, Europe and Asia Pacific will weigh in on the prospects for real estate debt and equity markets for 2024. This episode is part of our 2024 Outlook series, which in addition to this episode includes conversations on public fixed income and direct lending. You can follow along on our streaming income podcast feed, our YouTube channel, or by visiting barings. com where we'll be posting audio, video and written versions of these conversations. With that, here is Barings, Maureen Joyce to kick off the discussion.

Maureen Joyce: Hi, we're thrilled to host so many of you from around the globe for our 2024 outlook. I know it will be both informative and an interesting discussion for you. My name is Maureen Joyce. I'm the Head of US real Estate Asset Management and Equity Portfolio Management. I'm really excited to be your host today in moderator for today's round table discussion with my colleagues, John Ockerbloom, Nick Pink and Alistair Wright. Over the next 45 minutes or so, we're going to dive into the outlook for global real estate markets as we head into 2024. This year the theme of our outlook is coming into focus. From higher rates in persistent inflation, although there has been some recent news on the inflation front, but to also mounting geopolitical tensions around the globe. There's no shortage of uncertainty as we look toward the year ahead. But at the end of the day, real estate is a local business. The best investors are making decisions not only by assessing top- down influences, but largely by focusing on bottom- up circumstances and considerations. As such, our group today will bring it to focus the key themes, risk and opportunities that they're thinking about for the year ahead based on what each of them is seeing on the ground in their markets. Our goal is to give you a window in how the team is making investment decision in the hopes that we might be able to provide some clarity and help you inform your views and decisions heading into 2024. With that, I want to start with introductions. I'd like each of my colleagues to briefly introduce themselves. I'd also like them to share an interesting book or podcast with you. I'm going to start here in the States and ask John Ockerbloom to introduce himself.

John Ockerbloom: My name's John Ockerbloom. I'm the Head of US Real Estate for Barings. I would say an interesting podcast is Streaming Income from Barings, that's one. If you need one other one. I'm a big fan of a podcast called Criminal, which is exactly the opposite and focuses on notorious crimes produced here in the state of North Carolina where I am based and where Barings is based. And from a book standpoint, I'm reading American Prometheus, which is the story of Jay Robert Oppenheimer and the book on which the film Oppenheimer was made.

Maureen Joyce: And Nick, why don't you introduce yourself please?

Nick Pink: Yeah, good morning, good evening, good afternoon. So I'm Nick Pink, I'm Head of Real Estate Europe, John and Al's opposite number over here. I think actually I probably qualify as the Barings vet on this panel having been in part of the platform since 2010 and building out the business in equity and debt real estate. And today we've got a big vertically integrated team of around 70 real estate professionals across Europe. Because as I'm the vet, I'm actually not very much into podcasts I have to say. So I'm going to focus on book and I'm probably going to bring the tone down and say that for me a bit of gratuitous escapism is really what I need, particularly in markets like we're currently in the midst of. And my go- to at the moment and probably for a lot of time is actually Lee Charles and Jack Reacher, the Jack Reacher series, which I'm sure a lot of you are familiar with, which is majorly formulaic. But I mean that's probably what you need right now and to sort of indicate how formulaic that is. I thought I was starting the new 29th book a couple of weeks ago and I probably got about 20 chapters in before I realized I was actually rereading the ninth book in the series.

Maureen Joyce: And Al, please introduce yourself and let us know what you're up to and from a reading or listening standpoint.

Alistair Wright: Thanks Maureen. My name's Alistair Wright. I'm based in Sydney, Australia. I'm the newbie having been with Barings now for just over a year. In terms of book, I'm actually reading a book called Outlive by Dr. Peter Attia and it's all about living a long and healthy life. Also, importantly, it's about being proactive about your health rather than just reactive. And I think that's something that we can apply in our working life as well as our health.

Maureen Joyce: Thanks so much. I'm going to insert myself here and recommend a book that I just finished called Horse by Geraldine Brooks. It's beautifully written, it's so interesting. It's an intricate story. That horse, that central figure connects human characters. There's a lot more to the story. I'll leave it there and let you all take advantage of reading the book yourself. So now I'm going to kick off today's discussion, but in keeping with our theme of coming into focus, there is a lot of focus or seeming consensus that we're in a period of prolonged higher for longer rate environment, something that wasn't a consensus even a year ago. What are you all seeing in terms of the impact of higher rates in your regions, including less obvious places and how are you shifting your thesis based on the idea of higher for longer? John, can I start with you?

John Ockerbloom: Sure. So I am a higher for longer believer and I'm also of the mind that this is not bad news for the real estate market that higher for longer a mid- range treasury rate in the 4% range or thereabouts I think is indicative of stability and much more consistent with a long range average. And I think it can be a positive. Where we're seeing the impact of interest rates? I think these places will be consistent across the globe, but a handful of places. Number one, transaction volume is meaningfully reduced. The shock to the system of the doubling of the risk- free rate has created a wide bid ask spread around assets and that has led to stasis that's been coupled with lender's willingness to accommodate borrowers at least in the near term. And all of that has conspired to make a transaction pipeline that's pretty small relative to historical loans, maybe 60% down from averages over the last several years. Secondly, valuation. Valuations, when you double the risk- free rate, all risk asset classes need to adjust in value, all that's held equal. And we're seeing that play out in the private market as well as the public market for real estate in the United States. From a positive standpoint, one place is that we're seeing the impact of rates is I think we're finally seeing some nominal cooling on material cost and maybe even to some extent labor for a development and redevelopment activity. It still isn't where we need it to be and prices are still very high, but we're starting to see some impact from the Fed's activity.

Maureen Joyce: Thanks John. Nick, what are you seeing and what's the impact of rates on your markets and your investment thesis?

Nick Pink: Yeah, I mean just before I sort of tackle that point, maybe just going back to your opener yet. Clearly they're higher relative to where they were in'21 and for a long period before that. And as John says that wasn't normal. We're heading back to a new equilibrium which is going to look a lot more like probably the interest rate environment we all started our careers in. So that is for sure longer, yes, but I think what does longer look like or that's too in flux week by week, day by day at the moment as we sort of grapple with the latest leading indicators that come through on a day- to- day basis. Clearly, the US is driving monetary policy as the global reserve currency. So whatever we do over here, we have half an eye on what's going on with the Fed. But in Europe, we're in a slightly different place. We've taken some pretty hard medicine and growth has pretty much ground to a halt and inflation has dropped back towards target in most jurisdictions as well. So I think, and even in the UK which has probably had the stickiest inflation, we've seen some pretty dramatic falls recently. So I think rates are set to ease certainly into the second half of 2024, especially if it does look like some of that medicine has maybe been a little bit too late and too strong ultimately. So for us, in terms of what does it mean? Yes, same as John, volumes are down, valuations are adjusting and near term, in terms of what we are doing, well, it's really been that shift away from equity to towards debt. Where the ruby prices has obviously happened a lot more quickly. I think laterally we're beginning to see a shift back a little bit towards equity strategies, certainly in the value add opportunistic space. And at that end of the spectrum, I think the higher for longer rates that really sort of bites at REFI. So that's where the stress is beginning to come through. I think that's going to be a key theme for us as we move into 2024.

Maureen Joyce: And Al, how about down under?

Alistair Wright: Yeah, I think, look, it's worth acknowledging that there's volatility in the rate outlook and what we think today may change over the next three to six months. We are focused on strategies that focus on thematics and not dependent on rates. Having said that, if we do assume a higher for longer scenario, our market being highly institutionalized, they were hoping I think that they could hold their assets through this cycle and as rates came down the valuations would go down but then come back up and I think there's a realization that that is unlikely to happen and so we're seeing a bit more propensity for those groups to sell assets. And so coming into 2024, I think we'll see more liquidity in the market and that gap between buyers and sellers will narrow.

John Ockerbloom: Just the last thing I would say about rates, and I think I speak for all of us, is that this change, this adjustment of valuation, this is going to lead to greater differentiation of outcome and it represents what I think of as a stock pickers market in real estate. The quality of your team, the quality of your infrastructure, the ability to pick assets is going to really lead to greater differentiation than we've seen over the past, call it, 10 years when in a raging bull market lots of boats rise with the tide. And so I'm optimistic about our prospects looking forward regardless of where the rate environment goes from here.

Maureen Joyce: So it looks like we all agree that it's higher for longer. You've all mentioned what that means to a certain degree on what will happen with asset valuation. This has been an area that's been quite hazy recently, especially around certain sectors like office because there's such a big difference between where buyers and sellers are. Should we expect to see more clarity in the year ahead with regard to where values come out?

Nick Pink: I think in Europe at least the valuation shift has really been a feature of the market probably since, in the UK really since Q1, Q2, 2022. And the UK is always the most liquid and transparent market so it tends to adjust pretty rapidly and then ripple out across the region. And that's really what we've seen in this cycle. Public market valuations are pointing to, in Europe at least, are pointing to valuation adjustments when you strip out the leverage impact of something between 20 and 25%. And if we look at what we've had so far in Europe, if you look at the MSCI indices, for Europe as a whole, they're off about 15% of the midyear. Looking at the valuations that are coming in now across our funds for Q3 and looking ahead to Q4, you can easily expect to see I think the indices push out at that 20% lower end of the range by the year- end. So I think maybe that's a long rambling way of saying that maybe Europe's a little bit ahead of the US and Asia, which may be given what the driver has been here, particularly the local conflict shouldn't be a great surprise, particularly given our reliance on Russian gas and the export led economies that we have here in Europe. But it hasn't been a uniform picture that is for sure. So it has rippled out from north to south, it's still going on. We've got a couple of quarters left to come. And probably the final thing I'd say is that the saving grace so far in this adjustment has probably been the strength of the occupational markets over here. So rent value growth indexation as well of course with inflation has really helped mitigate that cap rate impact that we've seen across our markets over the last 18 months. The big concern of course is that the impact on the economy that we're now seeing with a big slowdown in GDP growth could start to have an impact on demand and growth. So there's a big question mark there.

Maureen Joyce: Al, what are you seeing in your markets?

Alistair Wright: It's interesting to hear Nick's observations. I think in our market the valuations tend to be much slower to come through and they come through over a longer period of time. So I think we feel we're sort of in the middle of that valuation decline and that's mainly because our valuers need to see transactional evidence to then value other assets, which I think is a little bit different to certainly the UK market where sentiment plays a bigger role in those valuations. So I think over the next six months we will see those valuations come down. And our market, our institutions often don't want to sell at below book value. And so the quicker those valuations come down, what that will result in is more liquidity in the market and that liquidity is needed, valuations coming down, more pressure on debt covenants and the like. And I think the result of that will be more transactional activity.

John Ockerbloom: I'm going to actually ask a question if I can Maureen, without stealing your job. And this for, Nick, for you and Al, do you sense that the private market has confidence in valuations as they are being reported vis-a- vis the public market? I have an answer for the United States, but Al's answer sort of triggered this question for me. Is there, on a one to five, with one being most confident, where would you place the investor market's confidence in private valuations?

Nick Pink: Yeah, it's a mixed picture. Obviously, we're operating across multiple jurisdictions with very, very different market practice in terms of the way they appraise assets. Although things have probably got a lot closer in this cycle than they have in the past. But you probably move from the UK, the most liquid transparent market out there, which is more willing to value on sentiment to Al's earlier point. And certainly in the logistics space, probably in all things residential, there's a reasonable degree of confidence that that appraisals are reasonably approximate with clearing price and that sort of spreads north to south across Europe as we become a little bit more opaque in the market. But generally speaking, logistics adjusted quickly and deeply. So I think they're broadly in line with where pricing is today. There's a good sense for where the floor is. I think where the big concern/ question mark comes across Europe is in the office space because there's been so little price discovery in office of NB quality anywhere and the only activity that you really do see is probably from the high net worth private wealth sector, which really isn't return seeking. So a lot of the activity there is just taking an opportunity to park money in locations that are perceived as wealth preserving. So you can't really take that as a real estimate of worth in the current market environment. So office is still a concern everywhere for sure.

John Ockerbloom: Got it. Al, what about in Australia? Is there widespread of acceptance that values are reasonable relative to clearing levels or is it more of a concern? Then again, I'll answer at the end. I'm not just putting you on the spot.

Alistair Wright: That's a good question. And I think our market, everybody sees that the valuations are going to be lower at 31 December than they were at 30 June and again at 30 June next year. So it's almost an anticipation and nobody wants to catch that falling knife. So where we are seeing assets clear is often at five to 10% below book value, particularly in office there is limited activity a little bit and that activity is 10 to 20% below book value. So I would say there's not a huge amount of confidence in the current valuations, but a general acceptance that they'll continue to come down, albeit moderating.

John Ockerbloom: So for the US, I think it's fair to say that I wouldn't call it a crisis of confidence in the private market valuation model, but it's a significant concern that values in the private market are not reflective of clearing levels or anything resembling it. I think like you it's a process and appraisals are rearward looking and they're generally considering arms length transactions with willing buyers and willing sellers. When you don't have many of those, you either rely on historical information that's more stale or you conjecture, which it sounds like is sort of the barbells and it's hard to do that. And so I think that there is some concern, the valuations haven't yet adjusted and aren't kind of reasonable in the private market. I think that probably exists more for office than any other asset class. But when you double the risk- free rate, if we all think about our asset classes of requiring some premium to the risk- free rate in order to make them investible, that premium changes when the risk- free rate doubles. So how does that impact value and so forth. Big questions that are playing out over time, but it's an interesting perspective to hear globally how the world's thinking about it. Back to you, Maureen. Sorry to take your job.

Maureen Joyce: No, this is what we're trying to do. We want a conversation. I'm going to shift gears a little bit and talk about where you see opportunities. Real estate debt generally seems to be more in favor than real estate equity currently in the United States at least, and I'd like to understand why you think that is and what opportunity exists in the debt markets. John, can you kick us off on that discussion?

John Ockerbloom: Yes, this is the good news section of the podcast. For those who are paying attention at home, this is the opportunity that we see in the debt market in the US. Debt has been a business that we've been in for many, many years. It's an area that has been a core part of our operation for as long as we've been around. And the market conditions for real estate debt in the United States today are very favorable to lenders. Handful of reasons for that. Many related to interest rates, some related to transaction volumes. The biggest driver of that is that banks have largely exited the market and banks were a very substantial percentage of the total lending volume, particularly in areas like construction and in real estate lending generally. The regional banks were very active, the money center banks were very active and that activity has largely stopped. And it stopped for reasons other than necessarily big credit challenges in the book. What's happened is lenders have not been getting paid back as quickly as they anticipated and they made loans in anticipation of being paid back. So the example I always give of if a large money center bank has a$ 20 billion book wants to grow by 10% in 2021, that would make$ 2 billion worth of loans. But if they expected to get paid back$ 2 billion, then they'd make$ 4 billion worth of loans in that year expecting to get to$ 22 by year- end. They went ahead and made those$ 2 billion worth of loans and the$ 2 billion that they expected to be paid back wasn't paid back as expected. And so now they have a $ 24 billion book and they're overweight. So that scenario has played itself out very frequently. It's because loans have not been paid voluntarily early as would've been the case in an ordinary cycle. So borrowers are holding onto the money longer if they borrowed at favorable terms, not paying back as quickly as they otherwise would. So banks don't have capacity. As a result, being a lender in this market is favorable. There are other factors at work, but I would say that combination of spread, ability to secure loans with great sponsors, cash equity, lower advance rates and better documentation, which is sort of the unsung hero of this cycle are all more favorably tilted toward banks. By the way, as an owner of equity, which we are also, all of that is challenging for us. So we're confronting it on both sides. But from a debt standpoint, very favorable time to be a lender in the US.

Alistair Wright: Can I just ask a quick question? On that, John, where have you seen the returns and what you can charge essentially for that? How's that moved over the cycle given interest rates and given the lack of capital or the change in the amount of capital available?

John Ockerbloom: Yeah, we've seen spreads cap out 150 to 300 basis points, so thereabouts. In some instances, construction lending spreads have widened very materially. But I think that it's the combination of increased spread and enhanced credit quality that are coexisting that makes it such a unique and interesting time. When you have a spread that is gone up and let's just say by 100, 150 basis points, to have that coincide with an advance rate that's gone from 70% to 60% from a sponsor that is a regional sponsor to a national sponsor, very well capitalized to completion guarantees that are more substantial to a cash equity requirement that is better to reps and warranties that are better covenants. Sort of every element of the loan process is tilted in favor of the lender. We want to be respectful of that. We're not here to take advantage of market conditions in favor of our customers, but we're able to make selections in terms of the way that the people with whom we do business and the types of deals that we finance that are very favorable to us and to our investors. So pretty meaningful.

Maureen Joyce: I'm going to move us along a little bit. So to find out what's happening in Europe and Asia- Pac, I'll start with Nick.

Nick Pink: Yeah, I'll try and be brief, but I mean broadly speaking, the dynamics are pretty much the same. I'd say the market structure in Europe is a little bit different, which probably has some positives and negatives. I mean we're still bank dominated here outside of the UK at least. On the plus side, real estate I think is real estate leverage as a percentage of total bank loan books is a little bit lower than it was in the previous cycle and a little bit lower than I think it is in the states. So with fewer alternative lenders in the market space and with a more regulated banking sector in this cycle, liquidity much like in the US is really tightly constrained and the banks themselves are far more constrained in terms of the covenants and the LTVs they're willing to offer out to the market. So there's definitely an opportunity, but it's a far more immature market and the opportunities really in those parts of the market where the banks have retreated from, so whole loans, construction lending, that is where the opportunity I think to generate some excess returns is in Europe.

Maureen Joyce: And Alistair, when I ask you to talk about the debt opportunities, can you also jump into what will be my next question are where do you see opportunities in equity? Because there are some.

Alistair Wright: Yeah, definitely. Just finishing off on the debt, our market is characterized by four big banks and there is liquidity in that market. In fact, the margins that we are seeing on the debt that we're procuring for our equity business are the same if not lower than what we were seeing a couple of years ago. So that competition is still there and there's more capital in the non- bank lending market. So there is opportunity, but certainly not to the same extent. And sounds like the risk adjusted return certainly in the US are really favorable in the debt markets. So we're a little bit like you, Nick. We're a bit further behind that opportunity, but it is still there. Look, I think in terms of the equity market and our business is, we're just starting out on the debt side, but we've been an equity investor for 15 years and through coming out of the GFC and through cycles. What we focus on is we focus on thematics and trying to be ahead of those other investors in identifying strong thematics. And that goes to real estate fundamentals of demand and supply. And what we see at the moment, particularly in Australia for a number of reasons, is the residential marketers demonstrating really strong fundamentals. Demand is high. We've got strong immigration, we've got foreign students coming back after Covid. And supply is very much constrained. We've all had the shock of construction cost increases. We've got a very complicated planning system and none of those things can be fixed quickly. So we see over the next five to 10 years a real imbalance between the demand supply, which is going to impact both rents and values. Our business does a lot of development and we do that ourselves and not with partners. And the opportunity for us is I would identify in the residential space matching the right capital because it is a journey when you develop these projects over a period of time, but matching the right capital to opportunities in that residential space to produce new product. As our market continues to be institutionalized, we're really excited about that opportunity over the medium term.

Maureen Joyce: In the US we've talked a lot about residential. What do you think of those strategies and what other strategies from an equity standpoint do you find interesting coming into 2024?

John Ockerbloom: Yeah, in the US we think very similarly. I think this is consistent across our entire business globally. We think thematically. We are research informed and we're driven by macro themes that exist within our respective markets, and in some instances that exist globally. And it's a real advantage that we have in being able to work together. I would say in the US one of the biggest trends at work is housing affordability, household formation and the need for housing for people. Housing affordability is moving in the wrong direction in terms of homeownership. The population of renters continues to increase and although supply has increased, rental growth has been very substantial in apartments and in other forms of residential housing pretty consistently over the last 10 years. And we expect that to continue, probably not to the same extent of the same inflationary extent, which I think is unsustainable. But the long story short is people need a place to live and it's harder and harder to be able to buy it. And so we expect that trend to be durable and to continue over time. So that's a macro trend that we believe in. That includes apartments, that includes built to rent, single family housing, that might include senior, that might include student, that can include debt strategies that support all of the above. And so we think that's an outstanding strategy. Beyond that, the fundamentals of industrial continue to be very good. Retail has been sort of a very strong performer in under the radar fashion since probably third quarter of 2020 as the pandemic began to shake out. And hotel is probably the last one. We have had a lot of success in the hotel area. I think the ability to raise rate every day in the inflationary environment has been beneficial for that asset class and increased discretionary expending among leisure travelers has been another macro trend. So all of those are the ones I would say.

Maureen Joyce: So Nick, that's a big list of opportunities in the US. What are you seeing?

Nick Pink: Yeah, look, it's a very similar picture. I mean, like my colleagues around the world, we've always been structurally focused for more than a decade and the market reset doesn't really change any of that. It's just creating a new price opportunity. So coming out of the pandemic and with the impacts of inflation and rate volatility, I don't think the fundamentals change. So look, in many ways I think it's kind of like a bittersweet point in the market. I think from my perspective, clearly there are some lots of issues still to navigate as this reset goes on, but I think there's a growing opportunity which doesn't come around very often. That's the sweet part of all of this, isn't it really. We're dealing with issues in our portfolios, but you need to put that in perspective and look forward and think about the next cycle and the opportunity that frankly we haven't seen for at least a decade. So we need to be ready with conviction. That's my positive spin on the current situation. If you have dry powder, and I know we have a bit of that across our platform in equity and debt, it's a great time to get ready to make some excess returns. And like John and Al, industrial, all things living, they're both relatively immature within the European context, so our focus is still going to be in those places. But in the near term, at least, a very near term, I think it's probably more from my perspective, it's probably less about the sectors and more about the opportunity because over the next 12 months particularly is when we expect to see some distress and that's really where the focus is, I think in the near term to generate excess returns. But keeping an eye on those thematics, of course, as always.

Maureen Joyce: So at the end I'm going to ask you to tell me what vintage year will be the best buying opportunity?'24 or '25? So think about that. Right now we've talked about opportunity, where are the risks? What's keeping you up at night and why? Alistair, let's go back to you.

Alistair Wright: Yeah, so as I mentioned before, we've got quite a substantial development activity and development book and it's been a pretty crazy time with costs going up 30%, the impact that has on project feasibility, particularly residential where a substantial amount of the total cost relates to the build. And you've got builders that are struggling, some of them going into administration, even some of our bigger ones have filed for administration. We've got a planning system that some would say is broken, but it's really challenging to navigate. So it's those things that we try to navigate every day and work very hard. And the key for us is having the right capital partners in those strategies so we can be patient, we can bring them along on the journey, they understand the volatility, and if we've got the thematic right, hopefully then the returns will follow even though there's a bit of a journey to get there. So that's the things that keep us up at night. And thinking hard as to how to navigate.

Maureen Joyce: I'm curious, when you look at some of the risks that you mentioned about the strength, the financial strength and wherewithal of the builders, would you or are you considering any operating company investments to take advantage of what you know is a strong builder but might have some financial issues right now that we could support them on and get them back on their feet and obviously produce outside returns?

Alistair Wright: I like that idea. It sounds good. But look, we haven't thought that hard about that at this point. They're complicated businesses and it can be a bit of a murky world. So we're partnering with people that we know and we've worked with four years and we're doing it in a different way. We're probably a bit more rigorous on the way in assessing those builders and we're keeping very, very close to them during the process. What we have done in the past, and what we would do is we'd always be in a position where we could step into their shoes, should there be that issue. Every time we appoint a builder, we've got a plan. If that does eventuate, that we can do that. And that goes to the financial management, but as well as being close and understanding those projects.

Maureen Joyce: Nick, what are you thinking about in terms of risks? What's keeping you up at night?

Nick Pink: As long as I've got my Jack Reacher novel, nothing keeps me up at night. But look, in those rare moments when I do wake from my slumber, a couple of things, the refinancing war we've talked about, that's obviously a concern. It's a potential destabilizing factor, it's a potential opportunity as well, of course. But it does require banks in Europe, lenders to meet investors halfway to be, to some degree, accommodative and flexible. And I think a lot of the refinancing right now is in unfavored sectors as we've said so, and new regulation as well is obviously a constraint. So that's a concern to me. I think geopolitics, that's as we've seen over the last few years that can knock the best laid plans off target. And looking forward, even over the next 12 months, there are still plenty of flash points to navigate in the near term and that can have an impact on the recovery we've all been waiting for so long. So probably the final thing in Europe, probably a little bit connected to some of the points that Al made. I think legislation in Europe has become a growing concern as sort of the political cycle matures here. Particularly in the residential space, we're now beginning to see societal political pressure on governments to bring in rent controls in places like the UK, like Spain where we haven't seen them before. And obviously in some of these sectors we've all been buying into the fundamentals which have been supporting rental value growth, which is now potentially under threat. And I think not much of that is actually baked into people's business plans. So that's definitely a trend we're watching really closely.

Maureen Joyce: John, what are you worried about?

John Ockerbloom: 356 days till the next election, and I can give you the hours if you like, because what keeps me awake and the potential for weirdness is high and weirdness is generally bad for markets.

Maureen Joyce: So I'm getting back to my strongest vintage year for investing. Lightning round. Nick,'24, '25, maybe even'26.

Nick Pink: Yeah, look, maybe I've sounded too bullish here, I don't know. But look, it won't surprise you to hear me say 2024. I think that's going to be the year of maximum opportunity. And if you're going to wait until 2025, you're probably missing some of the best deals in Europe. So we're certainly gearing up for next year.

Maureen Joyce: John, what about the US?

John Ockerbloom: I'd probably say 2025, if I had to guess. My first answer is if I knew the answer to that question, I'd be a seer, but I think that transaction volume is really going to be somewhat slow to play out. And so I think that I'm inclined to think it's 2025. I think 2024 could be terrific as well. It's just a question of how long does a fund take to get up and running from a vintage standpoint. If you could raise money immediately, the best opportunity may well come in 2024.

Maureen Joyce: And Al, what do you think?

Alistair Wright: Well, I'm going to split the difference. I think we're focused on investing heavily through the bottom quartile of the cycle, and probably'24, '25 is going to be that. And to John's point at the beginning, I think getting the right investments at the right time is really important, but asset management, development management's going to be really important in delivering on those strategies. So we'd love to see 2024 and'25, I think a couple of good years and set us up for the medium term.

Maureen Joyce: Well, someone told me early in my career, people always say for real estate success is location, location, location. But it's really timing, timing, timing, and I hope we get it right. One last question, what's one bold prediction, and I'm highlighting bold, for 2024? And I'm going to start to take a little pressure off you guys. My prediction is Taylor Swift and Travis Kelsey will be engaged by the end of 2024.

John Ockerbloom: I kind of like that. And I'm willing to take bet, and I'm also willing to take the bet that that engagement does not last through 2024. We'll go both ways, and if we're specific in that, then we ought to be wagering. But I'll go next. Maureen, you've inspired me. Bold prediction for 2024 from me is that the 10- year treasury remains in the fours and that everyone gets peace with the concept that that's where it's going to stay, and it's not such a bad thing for real estate.

Maureen Joyce: All right, John, I'm writing it down.

Alistair Wright: It's probably not a bold prediction, but I think we'll have some interest rate cuts in 2024, particularly in the US, maybe not in Australia. We seem to be behind on everything, but I do think we will have some cuts. I won't even go to the prediction around the election that you mentioned, John. I'd be interested in that, but that'll probably take a bit longer than we've got. So yeah, that's a prediction for me.

Nick Pink: And for me, look on the interest rate theme, I think we will see a full probably in Q3 in Europe. In fact, I'm going to be bold and say we'll probably see 325 bips cuts by the end of the year at least. So you can write that one down as well, Maureen. On a lighter note, probably, I have to back England to win Euros in 2024 in Germany. That's soccer for my colleagues in the US. So yeah, that's my very bold prediction for'24. It's coming home.

Maureen Joyce: Thanks everybody for your predictions for 2024. I think we have time for one question, and it's coming in for the entire group. The question is, how has the definition of core real estate changed and how do you see core fitting into your diversified real estate portfolios? Al, would you mind starting us off on answering that question for the audience?

Alistair Wright: Sure, sure. Look, I think for us, the definition of core real estate probably hasn't changed a lot. I think it's an important part of our market and an important part of investors' allocation to real estate. I think that the returns in respect of what one would expect out of core have changed, and they're tied to the 10- year bond rate and a premium to that, whether that's two to 4%. I think what's really important in the core space is getting that sector allocation right, and again, following the right themes and being in those right parts of the sectors, we'll deliver outperformance.

Maureen Joyce: Nick, how are you thinking about the definition of core these days?

Nick Pink: Yeah, I'll maybe answer it in a slightly different way. I think the definition always varies through the cycle. Is core criteria looser than tight and tighten according to the risk environment? But I think from my perspective, I think probably the biggest change is probably in the shape of the investible universe when I look at that today relative to when I started my career. So maybe back then 20, 30 years ago or even 10 years ago, 50% of a typical core investor portfolio would've been retail. Probably 30, 35% would've been office. With the balance as industrial and the amorphous other. Because residential hasn't really been an investible or an institutional asset class in most jurisdictions in Europe with one or two exceptions. But if we look at it today, obviously that's completely changed. We've had the structural rollout of retail with the impact of e- commerce. We're now seeing similar structural change in the office sector or at least the fear of that structural change. And in Europe, all things living and industrial logistics have moved up as well. So the shape of a typical core portfolio is completely different. So I can't think of a bigger change than that. The other thing, of course, is the rise of ESG and sustainability that Europe at least is probably the biggest single core criteria that people look to first when they're assessing an asset and its value and its potential. So those are probably the two things I'd point to. But like Al, I'd say, look, I don't fundamentally believe that real estate is threatened as a diversified for asset allocators. I still think it still has that role. It can reduce volatility, it can produce better risk adjusted returns. And for that reason, I don't see long- term allocations to the sector at least reducing significantly.

Maureen Joyce: And John, can you give us your thoughts?

John Ockerbloom: Yeah. I'll say the common prevailing wisdom in the states today is that office will exit as a core asset class or largely exit as a core asset class. And that alternative asset, what were alternative asset classes such as storage or manufactured housing or other specialized asset classes will emerge and fill the gap that is left by office. I would say I agree, kind of. I think that office is less of a core asset class, but I think it's a mistake to say that there are not core office assets on a look forward basis. I think that's an overreaction, which we're great at in business generally, in the real estate business specifically. I think that there is a place in a core portfolio for a well- built, well- maintained, well- leased office building in the kinds of locations that are attractive to young talent. I absolutely think that core will adapt and their office will represent a smaller percentage of the whole. But I think I look at retail and say retail probably has a place in core portfolios, and if you ask people in April of 2020 if that would be the case, the answer would've been a very broad no. But I think what we've seen is that outside of malls and really a subset of malls, the retail has actually been a pretty good performer and has performed as you would hope it would in a core portfolio, particularly grocery anchored retail. So as not to indulge over reaction, I will say office remains a part of core, but smaller and more esoteric asset classes become a greater piece of the whole.

Nick Pink: Yeah, and John, just to jump in there, in case you think I was saying office isn't core, I completely agree with you. I wouldn't confuse the structural shift that we've seen in retail with what I expect is going to play out in office, which clearly we have a cyclical and a structural repricing to move through in the office space. But ultimately, yes, there are going to be core offices. There are core offices today for sure, which just seeing a development in the market and in the near term, probably an overreaction to the hybrid working trend, but there's definitely a future for office space.

John Ockerbloom: And while we're here, I'm going to throw one hot take, and that is that core is an underappreciated asset class today, and I would not be shocked if over the next 24 months we saw a window of opportunity to enter that space and to secure core assets that you'll be happy with for a generation.

Maureen Joyce: Well, thanks guys. It looks like we're at the end of the time, but I want to thank everybody who submitted questions and who joined us today. If we didn't get to yours, please reach out to your Barings representative and will continue the conversation with you. Finally and as always, we thank you for your confidence in Barings and your continued partnership with us.

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