On the fundraising front, real estate can be a bit of mixed bag.
As Bruce Flatt, chief executive of Toronto-headquartered Brookfield Asset Management, said on the firm’s Q2 2022 earnings call late last week, real estate “is somewhere in the middle” in terms of investor appetite for the firm’s strategies. These include infrastructure and renewables on the “most positive” end, while private equity was “hardest” for fundraising.
His explanation? While real estate offers “some great acquisition opportunities” in this environment, is cash flowing and can be inflation sensitive, some investors are unsure about certain property types.
Flatt’s comments ring true in certain parts of the market. Office continues to face headwinds –occupancy rates in one of the world’s preeminent working cities, New York, only just hit 40 percent in June – and with long-term leases still to be worked out, the property sector could face continued uncertainty for years. Retail has been showing some green shoots, but the enduring appeal of e-commerce continues to create challenges.
Meanwhile, rising interest rates have made deals more difficult to pencil and triggered repricing across property types in real time, since assets acquired at compressed cap rates may now have negative equity, multiple market participants have told us.
The investor hesitancy that Flatt mentioned can also be seen in capital flows into the property sector. The first half of 2022 saw the lowest H1 amount raised in the last six years, according to PERE’s latest fundraising report. Meanwhile, check sizes shrank slightly at the top end of the market, with the top 15 investor commitments totaling $1 billion less than last year’s biggest commitments.
Despite the market uncertainty, however, there are more reasons for optimism than concern for investors in the asset class.
Recent performance results demonstrate the resilience of real estate in investor portfolios over the last year. Both the California State Teachers’ Retirement System and California Public Employees’ Retirement System posted negative overall results for their fiscal years ended June 30 but found real estate to be a bright spot amid the dismal performance. Real assets were the best absolute performer in CalPERS’ $440 billion portfolio, yielding 24.1 percent. CalSTRS’s real estate portfolio was also its best performer, posting 26.2 percent in the trailing year.
Over in Europe, Norway’s Norges Bank Investment Management saw negative returns across the board in its half-year report released this week, except in unlisted real estate. The asset class generated a 7.12 percent return during the first half of 2022, versus -9.32 percent or lower in other asset classes in the portfolio.
Past performance isn’t always the indicator of future results, but history is at least informative. Post-GFC, both CalPERS and CalSTRS saw continued strength in their real estate investments relative to their broader portfolios. In fact, between 2011 and 2021, real estate outperformed CalSTRS’ overall fiscal-year returns in seven out of the 10 years, according to data from Publicplansdata.org. In CalPERS’ portfolio, real estate’s outperformance happened four times over the same 10-year period, underscoring the buoyancy of the asset class in both stable and volatile times.
Even in this market volatility, real estate values are unlikely to get wiped out like they did during the GFC, because the industry overall has been more prudent about investing – particularly in terms of leverage levels – since the crisis.
In the context of these factors, real estate compared to other asset classes should consequently move up the positivity scale for investors.