The size of the global professionally managed real estate investment market reached $11.4 trillion in 2021, while investors set a world record by completing real estate transactions totaling $2.1 trillion, according to a study of Morgan Stanley Capital International.
Thanh Bui, portfolio manager at Clarion Partners, a private real estate investor, observed during a Franklin Templeton webinar on Nov. 2: “Real estate has always performed well in times of inflation and could be a good hedge because Favorable market supply and demand conditions allow landlords to pass costs on to tenants in the form of higher rents.
Real estate values tend to stay the same or increase over the long term. The Dow Jones US Real Estate Index, an index designed to track the performance of real estate investment trusts (REITs) and other companies that invest directly or indirectly in real estate through development, management or ownership, including real estate agencies, had a 7.34% annualized total return over the past decade.
Addressing rising rates and the expected slowdown in global economic growth, Neil Cable, head of European real estate investments at Fidelity International, at the MSCI Real Asset conference, said: “The consensus in the market is that significant headwinds ahead of us,” said Neil Cable, head of European real estate investments at Fidelity International, when discussing rising interest rates at the MSCI Real Asset Conference on Nov. 3.[Though] in this cycle, asset repricing may occur more rapidly than in previous cycles due to a greater diversity of risk appetites and more global players in the overall investment market .
While high interest rates hurt equity valuations by reducing future free cash flow, a similar effect is seen in estimated property values due to buyers’ inability to finance large purchases. However, lower assessed land values, a consequence of higher financing costs, actually increase a property’s capitalization rate, making the same cash flows provided by a property more attractive as a return, when considered an investment with limited return.
“I think we’ll see a lot of consolidation; this could be a particularly attractive opportunity for, say, a US-based fund to buy European assets, given the strength of the currency and the long-term outlook for real estate,” said Ian Goldin , guest speaker at the MSCI Real Asset Conference and Professor of Globalization and Development at the University of Oxford.
Goldin considers demographics informative for any long-term real estate investment strategy. Demographic changes have an impact on the commercial and residential real estate market because they inform the behavior of tenants.
“We are seeing dynamic growth in cities around the world, and the reason for this is that we have seen age of marriage occur on average 10 years later than historical averages, as fertility has fallen in advanced economies. “, said Goldin. “I think we will see the retirement age change and the demographics continue to change in these economies, and that will change how we invest and invest in the future.”
Similarly, Bui takes an in-depth look at demographics to inform his real estate investment strategy, researching “where people are moving before they know they are moving there.”
One of the major demographic shifts the business world has responded to is the shift in the way employees work, with hybrid and work-from-home policies becoming commonplace among employers.
The work-from-home movement has seen an increase in job vacancies around the world, although the trend is most dominant in the United States. Currently, the office vacancy rate in San Francisco stands at 25%, according to CBRE, and the New York market isn’t doing much. better, with 16% of offices still available, according to Colliers.
Despite this change in the way people work, commercial real estate as an asset class and cities as they existed before the pandemic are going nowhere, argued Elizabeth Szep, senior associate in the real estate department of Abu Dhabi Investment Authority.
“Work from home trends have been very persistent since the emergence of the pandemic,” Szep said. “What we’ve learned with the rent rebounds in New York is never to bet against the cities.”
The shift to hybrid working has not been a negative for amenity-rich Class A commercial properties. Buildings with open rooftop terraces and green spaces offering on-site janitorial and maintenance services always attract higher occupancy levels.
However, Bui said, “Offices are currently split as a market, between obsolete or potentially obsolete Class C or B buildings and amenity-rich Class A buildings. There is a real flight to quality, because everyone is trying to figure out either working from home or hybrid office life.”
Class B and C spaces potentially present an opportunity for real estate investors, if the price is right and the projects attractive.
Goldin said he thinks a lot of construction and renovations are imminent, but he asked the question, “Can we turn retail into entertainment, office into residential?” He replied: “Yes, but I think we will see a lot of demolition [of] buildings that cannot be retrofitted, so how some of these stranded assets will be recycled will become a higher priority in the future.
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Tags: Alts, commercial real estate, Elizabeth Szep, Franklin Templeton, Ian Goldin, Kiran Patel, MSCI, Real Estate, Thanh Bui