Industry experts offer their views on the real estate market’s resilience, discuss its main challenges and identify which subsectors are gaining momentum.
SAM STEELE, INVESTMENT RESEARCH DIRECTOR, PRIVATE MARKETS, RUSSELL INVESTMENTS
Beds, sheds and meds:
Like every other asset class, the real estate market has been impacted by the economic fallout from Covid-19. However, some sectors within real estate have arguably benefited as a result of the pandemic, and trends that were emerging have accelerated.
The logistics sector will continue to be a winner, with a strong demand picture driven by ecommerce and supported by supply chain reconfiguration. Urban logistics and site repositioning plays provide new investment opportunities, acting as a quasi-proxy for the retail sector.
In addition to logistics, the focus for 2021 will be on ‘beds, sheds and meds’ as the logistics and alternative sectors (healthcare, life science, residential) increase in importance to future-proof investors’ portfolios to the detriment of retail and office.
Defensive real estate: We currently do not hold a strong regional allocation preference, but in the near-term, Asian countries that have been able to contain Covid-19 may prove more resilient. Overall, during this uncertain period, we think that manager, sector and asset selection will hold greater weight on investment performance than regional allocations. As 2020 has highlighted, portfolio diversification is important to create a defensive real estate portfolio.
MARC BERTRAND, CEO, AMUNDI REAL ESTATE
Bonds versus real estate:
While real estate assets are not a substitute for bonds, they can be used in addition to bonds as part of a portfolio. Along with its diversification impact, real estate can be attractive to investors looking for income, in particular as many leases are indexed to inflation and today the gap between prime yields and ten-year government bonds is high. We have observed that real estate portfolios that are diversified both geographically and by asset type have displayed resilience in the income distribution in 2020, despite the Covid context.
One major difference with bonds is that real estate assets have no face value, though they do have an intrinsic land value.
Office vacancies: While the Covid pandemic has brought into focus asset classes like logistics or housing, we would caution investors not to throw the office out with the Covid bathwater! We believe offices will remain key for investors’ allocation looking ahead.
Historically offices are the number-one real estate asset in terms of investment turnover in Europe. The Covid crisis strengthens existing trends, with offices responding and adapting to occupier demand which includes flexibility, services, and high IT and technological standards. This should lead to the office market becoming more segmented.
TOM WALKER, CO-HEAD OF GLOBAL REAL ESTATE SECURITIES, SCHRODERS
The challenges for Shanghai and Shenzhen:
They are no different to most global cities. There is intense competition for land use driven by increasing levels of urbanisation. The key disruptive trends in all real estate markets at present are e-commerce and working from home.
China has the highest e-commerce penetration anywhere in the world. This is leading to strong demand for ‘last mile’ distribution facilities and data centres. There is also a significant focus on sustainability. This is exemplified by Shenzhen, which used to generate high levels of pollution and is now arguably one of the ‘greenest’ cities in the world.
Superior Covid response: The way that the majority of the large Asian cities have dealt with the pandemic is superior to Western cities. Therefore, we have more confidence in the ‘return to normal’ in these markets and are expecting stronger returns in the short term.
Covid-19 has not introduced any new trends to real estate markets: we were already positioned for greater levels of e-commerce, working from home and the exponential growth of data creation and storage. Prior to the pandemic, we were most excited about the key cities in China and the growth that they will deliver. What has taken place over the last 12 months or so has only increased our conviction.
PAUL JAYASINGHA, HEAD OF REAL ASSETS, WILLIS TOWERS WATSON
Secure income from leases:
We continue to like the “secure income” space – real estate characterised by long-term, inflation-linked leases to high-quality counterparties. Here we focus on the set of characteristics that make the most sense for our pension fund clients’ liabilities.
A great example here is UK specialist social housing, where we can find initial yields in the 5% area, with contractual inflation linkages, let to counterparties which are directly funded by local authorities. Rent collection has been solid throughout Covid-19 and the societal benefits of the strategy are compelling. In an environment where gilt yields are low and there are increasing concerns about higher inflation as a result of government stimulus, the strategy appears attractive.
No dramatic changes to asset allocation: To date we haven’t seen dramatic changes from our clients, which makes sense given the illiquidity of the asset class and long-term strategic views taken by clients. Prior to Covid-19, we had been advocating a shift towards ‘alternative’, more defensive property sectors such as healthcare, student, data centres and residential – especially those with compelling sustainability credentials. Given the ongoing challenges in office and retail, we expect this trend to continue.