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If you follow economic or investment news, you are well aware of the severe turbulence that has roiled the real estate industry, especially in the retail and commercial sectors. Despite these much-discussed challenges, banking giant JP Morgan sees a ‘generational opportunity’ in real estate in the coming decades. Keep reading to discover why JP Morgan believes in a real estate recovery.
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JP Morgan’s optimistic view on real estate appeared in the 29th edition of its report ‘Long-term capital assumptions’. The banking giant compiled this report to better understand the financial markets by looking beyond the current quarter or fiscal year. Alan Wynne, global strategist for JP Morgan, sees the report as a potential counter-strategy to what he described as the “short-termism of modern finance.”
This report combines numerous data points to generate a 10-15 year outlook for over 200 asset classes and 19 global currencies. Explaining why this is so crucial for investors, Wynne said: “Importantly, as the name suggests, these assumptions are for the long term (10-15 years) and should help investors make strategic decisions about the portfolio allocation.”
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Without this long-term perspective, JP Morgan’s investment decisions would be determined almost entirely by current market conditions, and that calculus could change quickly. For example, no one could have predicted how the COVID-19 crisis would lead to global supply chain crises and runaway inflation. This motivated central banks worldwide to raise interest rates, which had devastating consequences for several real estate sectors.
The retail and office sectors have struggled to adapt to high interest rates as major players in these sectors buy and develop assets. They typically rely on short-term financing to acquire as many assets as possible, a tactic that works as long as interest rates remain low. However, the rise in interest rates left many retail and office developers unable to refinance their debts, while vacancy rates skyrocketed.
These high vacancy rates translated into lower income, reducing the value of the property securing the loan. Many regional banks that invested heavily in commercial lending after 2008 suddenly found their loan portfolios upside down. Some banks, such as First Republic, were so exposed to unrealized credit losses that they faced insolvency.
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Ironically, depreciating real estate values and the glut of distressed assets are where JP Morgan sees all the longer-term benefits of real estate. The report states: “Elevated interest rates and challenging debt markets have driven down commercial real estate values. We see a generational opportunity emerging for long-term real estate investors as a direct result of the significant revaluation in valuations.” This is a classic buy-and-hold strategy, but Morgan thinks the market is now ripe for acquisitions.
More importantly, JP Morgan believes investors may not have to wait a decade before making money. For 2025, the report says: “Our 2025 long-term return assumption for US core real estate increases to 8.1% from last year’s 7.5%.” The best part is that you don’t have to be a billionaire banker to take advantage of these “generational opportunities.”
Real estate investment trusts (REITs) and real estate ETFs are available in multiple sectors at prices that can help you become a real estate investor for less than a pair of jeans. Many of them also generate passive income through regular dividend payments. So if you’ve always wanted to invest in real estate but thought you couldn’t afford it, JP Morgan says now is the perfect time to go bargain hunting.
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Lower interest rates mean that some investments won’t return what they have in recent months, but you don’t have to lose those gains. Certain private market real estate investments offer private investors the opportunity to take advantage of these high-yield opportunities.
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This article JP Morgan Analysts See ‘Generational Opportunities’ in the Real Estate Market as a ‘Direct Result of Valuations Being Significantly Revised’ originally appeared on Benzinga.com
