Covid fuels the mega-trends
The pandemic theme is prominent throughout the report as investors and fund managers try to comprehend how the crisis is going to affect their business both in the immediate term and medium-to-longer term.
There is a sense that covid’s main impact has been to “accelerate” trends that were already reshaping the built environment. Technology is a case in point; it was already disrupting traditional working and consumer habits pre-covid and, as a result, tenant use of property was beginning to change too, albeit at a steady beat. But lockdown has supercharged society’s reliance on tech.
Tomorrow’s world may have arrived earlier than planned and the sector needs to respond quickly to keep pace. “For investors and landlords, embracing those changes will be the focus going forward,” says Jelte Bakker, head of Asia-Pacfic real estate at Macquarie Infrastructure and Real Assets (MIRA).
Covid aside, several other issues threaten to rock the property boat. In December 2019, the UK elected a Conservative government willing to take a harder negotiating stance with the EU on Brexit, making a no-trade deal outcome – the worst-case scenario for many in the private real estate sector – look likelier.
Heading east, China, where many investors now seek new growth opportunities, tightened its grip on Hong Kong. The superpower is also exercising its muscle in more subtle ways across the Asia-Pacific region. China’s relationship with the rest of the political world, especially the US, is souring. It remains to be seen what the long-term repercussions will be on investor confidence to do business in the country and region as a whole. Thus far, PERE data suggest they are not yet spooked – 15 percent of funds closed in H1 2020 focused on the region compared with 11 percent in 2019. Sentiment toward Asia-Pacific, and China, in particular, is one to watch. Right now, business continues.
Investors show faith in property
The PERE Global Investor 100 ranking shows the sector’s top 10 institutions collectively allocated $443 billion to the asset class over the past 12 months, up from the $427 billion registered in the 2019 ranking, while the top 50 allocated $1.1 trillion compared to $1 trillion the previous year. The stability in allocations suggests that, virus crisis and geopolitical turbulence aside, institutions remain confident in real estate’s fundamentals.
PERE’s H1 2020 global fundraising total of $70 billion backs this up. Though that may seem disappointing compared to the $85 billion raised in the first half of 2019, in the midst of the pandemic the fundraising decline could well have been more severe.
Indeed, fundraising for the first six months of 2020 equals the $70 billion raised in the equivalent period in 2018 and is not widely off H1 levels reported in 2015, 2016 and 2017 – $73 billion, $77 billion and $76 billion respectively.
Logistics is the star pick
Pre-covid, industrial was already of interest to major institutions as consumers moved away from Main Street in favor of online retail. Now, confined to their homes, internet shopping has captured those who might have stayed loyal to traditional shops. Will those consumers revert? If not, the market will require more storage space, especially for last-mile delivery demands.
PERE data bring this into sharp focus. In H1 2020, industrial accounted for 58 percent of total fundraising compared with 25 percent in 2019. Investors are acutely aware of the direction of travel and adjusting strategies accordingly. “E-commerce requires three times as much logistics space, so that is a powerful driver of demand,” says Eric Wurtzebach, head of Americas at MIRA.
“Well-capitalized investors able to take a long-term view should be able to work through it”
Allianz Real Estate
“There are challenges to finding deals”
Canada Pension Plan Investment Board
“The relative evaluation of risk within property sectors has changed as a result”
GLL Real Estate
Office falls out of favor
In stark contrast to industrial, the office sector has fallen off institutions’ radars. With workers, especially in the service sectors, discovering during covid that they can do their jobs effectively from home, there is a valid discussion about whether we are witnessing a new era of remote working, or at least a more flexible hybrid model of office-based and remote working.
Either way, the demand for big office floor spaces in major hub cities is likely to decline. There is even talk of deurbanization as a knock-on effect from covid as workers grasp the opportunity for a slower pace of life.
It is difficult to gauge how this will play out long term. In the meantime, institutional capital is taking a cautious wait-and-see approach to the sector. Again, this is showing through in PERE’s latest fundraising data – in 2019 office accounted for 15 percent of the fundraising total; in H1 2020, its share fell to zero. “We will need to examine whether office assets are suited to future demand in the light of changing working practices, and therefore active management of office blocks will be much more important,” says GLL Real Estate’s executive vice-president Christian Goebel.
Data centers is one to watch
With large parts of the global population still working and shopping from home, internet usage has naturally spiked. This has led more than one commentator in this report to identify it as the asset class most likely to capture greater investor interest as data consumption and storage needs ramp up. “Data centers are providing new opportunities and we’ve spent a lot of time educating clients on the potential of this sector,” says MIRA’s Jelte Bakker.