In the latest episode of PropCast, Andrew Teacher, co-founder at Lauder Teacher, is joined by Paul May, Director and Head of Real Estate Equity Research at Barclays Investment Bank.
With years of experience in the real estate sector, Paul offers valuable insights into the evolving landscape of real estate investment, asset classes, and the challenges facing the market today.
A career shift: From Buy-Side to Sell-Side
Paul May’s career journey is a notable one, having made the less common transition from the buy side to the sell side of the real estate sector. In the world of finance, it’s generally more typical for professionals to make the opposite move, but May saw an opportunity to bring a more analytical, long-term approach to research and equity analysis, which was missing in the market at the time.
On the buy side, the focus tends to be more on short-term strategies, where decisions are often driven by immediate market conditions. However, when May moved to the sell side, he was able to broaden his perspective and embrace longer-term, structural shifts in the market. He believes that understanding these broader trends—such as the growing demand for office space and the impact of interest rates—allows for a deeper analysis that can better guide investment strategies.
At Barclays Investment Bank, May leads a team that takes a research-driven approach to understanding the real estate sector. His team’s ability to provide detailed analysis and a longer-term view on market trends has earned them a reputation for offering insightful, valuable research to their clients.
Telling the Right Story
A key piece of advice May offers to companies in the real estate and investment space is the importance of storytelling. In today’s volatile market, it is crucial for businesses to communicate their vision and strategy clearly, whether they’re in real estate, private equity, or any other sector.
May stresses that the focus should not be on short-term fluctuations in share price. Instead, companies should aim to make informed, strategic decisions that will deliver long-term value. The performance of a business, he explains, will ultimately reflect the decisions made over time, and by focusing on these larger decisions, a company can ensure long-term success.
“Real estate is a long-term, long-duration asset,” May notes. “It shouldn’t be dictated by the short-term movements in share prices or interest rates.”
For May, the goal is to ensure that companies focus on the bigger picture, investing in the right opportunities and raising capital when it’s appropriate. By doing so, the company will see positive returns over time, regardless of the daily market fluctuations.
The Paradox of NAV
A significant issue currently plaguing the real estate market, according to May, is the over-reliance on Net Asset Value (NAV) as the primary measure of a company’s worth. While NAV has traditionally been used to gauge the value of real estate assets, May argues that it no longer offers an accurate reflection of a company’s financial health.
“Many companies’ NAV is based on gross asset values that no longer reflect current market realities,” he says. “If companies were to try to sell their assets at these valuations today, the results would likely fall short.”
May believes that the market needs to move away from using NAV as a guiding principle and instead focus on more accurate, operational measures of performance, such as cash flow growth and overall P&L health. This shift in focus, he argues, would allow investors and companies to make more informed decisions in a market that is increasingly unpredictable.
Emerging Trends: Residential and Data Centres
When it comes to emerging trends in the real estate sector, May highlighted two key asset classes that have garnered increasing attention: residential real estate and data centres. Both sectors face unique challenges, but they also present significant opportunities for long-term, income-driven investments.
Residential real estate, particularly the build-to-rent (BTR) market, is struggling with several obstacles, including rising construction costs, regulatory burdens, and market uncertainty. May points out that residential real estate has traditionally been viewed as a capital appreciation play rather than an income-generating asset. With rising capital costs, however, it is becoming more difficult to achieve the income returns that investors are looking for.
“Residential historically has been more about capital appreciation rather than income generation,” May explains. “Given the rising cost of capital, it’s difficult to see how residential assets will generate the required income returns.”
Despite these challenges in the listed market, May acknowledges that private residential investments may still be viable, particularly when priced appropriately. However, for the majority of institutional investors, the outlook for residential real estate remains uncertain, particularly given the high development costs and regulatory hurdles facing the sector.
On the other hand, May is much more optimistic about the future of data centres. This sector, which benefits from the ongoing growth of digital infrastructure, has proven to be a lucrative investment opportunity in recent years. Data centres are in high demand as the world increasingly relies on cloud storage and online services, and their long-term income potential makes them an appealing choice for investors focused on stable returns.
“The yield on cost for data centres is attractive, and the sector fits well within the current income-driven investment environment,” May notes.
Changing Market Dynamics: The Return of Core Capital
As the real estate market continues to evolve, May also discussed the return of core capital, which had largely retreated following the global financial crisis. With interest rates rising and financing becoming more expensive, many real estate investors are finding it difficult to achieve the returns they had hoped for, particularly in more opportunistic strategies.
May explains that while core capital is returning to the market, it is unlikely to come in the form of cheap debt. Instead, investors are seeking long-term, stable returns, which are more likely to be found in core real estate assets such as retail, industrial, and data centres.
“Core capital has always been attracted to real estate because it’s a long-duration, income-driven asset class,” May says. “But with the cost of capital rising, it’s becoming more difficult for private equity investors to achieve the returns they once did.”
Instead, May sees a shift toward more institutional investors and listed companies that have the capacity to offer lower-cost capital and a long-term investment horizon. This shift, he believes, could be the key to unlocking more stability in the market.
Realistic Expectations and the Outlook for 2025
Looking ahead to the next 12 to 18 months, May predicts that we will see increased transactional activity as realism sets in across the market. Real estate investors are beginning to recognise that the high returns they hoped for may no longer be achievable, given the rising costs of capital and increasing volatility.
“Asset owners are realising that the returns they’re expecting today are not going to materialise,” May explains. “As a result, they’re becoming more open to transactions and deals that reflect the new reality.”
This more realistic approach, he argues, will drive activity across various sectors of the market, including retail, office, and data centre assets. He also suggests that we could see an uptick in IPO activity or a shift from private to public real estate companies, as the market adjusts to the new cost of capital and evolving investment criteria.
As May concludes, there’s reason to be optimistic about the future, despite the challenges ahead. The market is starting to embrace a more rational approach, and investors are recognising that long-term success in real estate is driven by operational performance and strategic decision-making.
This episode of PropCast was hosted by Andrew Teacher, co-founder of Lauder Teacher. You can subscribe to PropCast on Spotify, Apple, or wherever you listen to your podcasts. To hear more insights from key industry figures, be sure to listen to previous episodes, including our discussions on evolving market trends with other experts.
