When it comes to a value-add real estate strategy, Europe isn’t the place to look for the strongest growth and highest returns, according to Simon Treacy, global chief investment officer at BlackRock Real Estate. His recommendation: look further east.
“My view at the moment is that a value-add strategy in Asia is going to be a very good vintage year, because investors are looking more so at Europe than Asia,” said Treacy, speaking at a press breakfast at BlackRock’s New York City offices yesterday. Europe is typically the first area that US-based institutions consider when starting to invest overseas, given the greater comfort level with the region from a language and cultural perspective, and the shorter travel time involved, he said.
“As a consequence, markets like Japan and particularly China have been overlooked and underrated,” he said. “But the opportunities in those markets are just massive.” The Tokyo office market, for example, is equal to the size of Manhattan’s, London’s and half of Paris’ office markets combined, and the 90 percent of the stock is more than 30 years old, which means that many of those properties don’t meet current sizing standards. “There’s a whole forest of big, gray buildings that are 10 stories, 150,000 square feet, that need refurbishment,” he said.
He acknowledged that some investors were concerned about the slowdown in the growth of China’s domestic product growth. However, “even if China’s growth is five percent, in terms of absolute GDP, that’s a massive amount of growth in the economy,” he asserted. “And you’ve got ongoing urbanization occurring.”
Overall in Asia, “there’s more opportunities with more pipeline and there’s a greater risk-adjusted return now, because people are not fishing in China and Japan as much as they’re fishing in Europe,” he said. In fact, he estimates current value-add returns in Asia to be in the 15 to 18 percent range, compared with 13 to 16 percent in Europe and 11 to 13 percent in the US.
“We do see more growth pulling through value-add returns in Asia, because of the growing economies,” Treacy explained. “In Europe, we see a lot of value coming over through the restructuring that is occurring.”
Although the executive spoke extensively on investment opportunities in Europe and Asia, Treacy also zeroed in on promising areas in the US. For example, demand from retail customers that want one-day, or even one-hour, delivery of goods has created growth opportunities in the US industrial sector. “Your last mile, your last 10-mile small logistic hubs make a lot of sense in this new retail environment,” he said. “How they’re going to achieve that, it’s kind of infill logistics centers. The pattern of the industrial sector is going to change.”
The “sweet spot” in the US real estate market, in Treacy’s view, however, was grocery-anchored shopping centers, similar to a trend that the firm also was observing in China and Poland. “That’s where you’re going to see a lot of traction.”