AXEL DRWENSKI, HEAD OF RESEARCH, KGAL
Business travel’s comeback: In the current market cycle, the majority of investors are seeking out opportunities which are low-risk and provide greater stability. As a result, we have found that the appetite for residential and logistic assets in core European markets are high, whereas the demand for sectors affected by the measures to contain coronavirus remain very limited – for example, hotels and shopping centres.
The previous downturns have taught us that the moment for contra-cyclical investments will soon return, and subsequently, we are anticipating a comeback of business hotels and selected core retail locations.
Acceleration of trends: We have witnessed a strong shift of the demand from value-added and opportunistic investments to less risky ones. However, the pandemic should not have an impact for the long term. Apart from the downturn in the hotel sector, the development we have seen in 2020 (the increase in online trade, remote working, and the shift of the housing demand from the cities to the city fringes), is just the acceleration of trends investors should have already anticipated in their pre-Covid investment strategies. Furthermore, if you are looking for a stable cash flow, the last year has shown how important the diversification by sectors and countries is.
Cities worth watching: I would keep an eye out for London and Belfast. After years of uncertainty, there are many opportunities in London; and because of the special status of Northern Ireland, the region might become an attractive link between the European Union and the UK.
VARUN MALIK, EXECUTIVE DIRECTOR, APAC CLIENT COVERAGE, MSCI
Office vacancies increase: Asia-Pacific real estate was not immune to the impact of Covid-19. Struggling asset classes such as retail suffered acutely across the region. However, they have also recovered sharply based on strong policy and support provided by government such as in Singapore, according to MSCI Private Real Estate Indexes.
Logistics has bucked the trend and paradoxically has garnered even more capital, addressing the gap left within the consumption/retail segment. Office vacancies continue to increase across the board and, with valuation season upon us, it remains to be seen what adverse impact this would have on property prices looking into 2021 and beyond.
Despite the short-term challenges faced by real estate investors, the market doesn’t seem distracted from another major challenge: climate change. Especially in markets such as Japan, Australia and Singapore.
In fact, the pandemic has highlighted the wide-reaching impacts that seemingly nonfinancial and difficult-to-quantify risks have and can have on a portfolio.
STEFAN WUNDRAK, HEAD OF EUROPE RESEARCH, NUVEEN
The bond/real estate yield gap: European real estate allocations have been rising since the early 2000s and have continued to rise globally since zero-interest-rate policies have taken hold across the developed world. According to the Hodes Weill 2020 survey, target allocations to real estate have even accelerated again in the last year. Despite record low property yields, the yield gap to bonds is still not seriously squeezed in most markets; real estate remains relatively good value, which drives up allocations. Equity investments in real estate also offer the opportunity to create alpha, which is much harder in fixed income. However, valuations for real estate are high on an absolute basis compared to historical levels.
Unsurprisingly, it is real estate debt which is gaining a bigger market share within property allocations. While debt investments lack the upside of equity, predictable income streams and downside risk mitigation are making this form of real estate investment mainstream in a period of very low equity yields. Rent collection issues and the fallout of the pandemic on tenants, in particular in the retail and hospitality space, has further shifted allocation into debt in 2020.
With under $10 trillion (€8.2 trillion) of professionally managed global real estate according to MSCI, real estate allocation is still more than a magnitude smaller than the global bond markets, estimated at just under $130 trillion (ICMA) total outstanding volume. Real estate’s share will continue to rise as long as interest rates are so low, but it won’t rival the bond market in the foreseeable future.
JASON ORAM, PARTNER, FUND MANAGER, EUROPA CAPITAL
Profound changes: It is stating the obvious, but the pandemic has had a negative impact on real estate investment in Europe, with volumes for the year projected to be around 15-20% lower than in 2019, but still similar to 2016. This is only a superficial impact on the market and masks what are more profound changes.
The cause of the reduction in real estate investment in Europe is not simply due to the restrictions in mobility that frustrate capital movements in what is now an increasingly internationalised industry, but may be more substantially attributed to the undermining of capital market confidence in occupier markets and not just in the short term, but more importantly into the long term.
Although important, this isn’t just about confidence in occupier covenant strength as a result of the financial strain of the pandemic, but rather it is to do with the manner in which the pandemic is revolutionising the way in which we occupy real estate.
Trends that were evident pre-pandemic are being accelerated both for good and bad. This might be most evident in the trauma being experienced in the retail sector and the contrasting exuberance of the industrial sector, but it also applies to the future use of offices and even the homes within which we live, indeed the entire built environment is being rethought.
As occupiers, we are social beings, and ultimately, successful real estate has always been about creating social environments. Urban areas have been capable of demonstrating the best qualities of a social environment and must strive to continue to do so and meet our changing needs.