This article is sponsored by Macquarie Infrastructure and Real Assets
Global real estate investors find themselves in a changed world, with the end of a long upcycle coupled with widespread disruption and recessions in several countries, driven by the covid-19 pandemic. However, there have been a number of bright spots too, and larger investors and those investing structurally in particular seem more resilient to the changing market. Brett Robson, head of real estate at Macquarie Infrastructure and Real Assets (MIRA), talks to PERE’s Mark Cooper about the state of the global real estate investment market, and how investors like MIRA are addressing the current situation and approaching the future.
How would you characterize the global real estate investment market today? It seems the long upcycle is finally over.
We’ve always been firm believers in the cycle and that strongly influences the way we invest on behalf of our clients and our balance sheet. Even ahead of covid, we were seeing some early signs that indicated we were close to the top, but there is always a trigger for the end of the cycle and in this case it was covid. So, transactions are down, which is normal, but unusually, in this cycle all sectors have been affected to significantly varying degrees. Logistics, for example, has not just been unaffected in most places, it has also seen increased demand. Of course, the other big difference in this cycle is we’ve seen quite a lot of government stimulus to support both business and households. The banking sector is also in good shape, so the availability of debt and liquidity means there’s been no real distress yet as we have seen in other cycles. And there is a lot of dry powder in the market as well. It’s also worth noting that equity markets are buoyant and if they are a reliable forward indicator, they are signaling a return to strong growth, which should support real estate.
How has covid-19 affected real estate?
Covid has really acted as a trend accelerator, which is why there has been quite a different impact across the different sectors. Retail was already experiencing challenges due to the switch to online shopping, which benefits logistics, as online retail has boomed. There has been continued strong demand for capital deployment opportunities in logistics development around the world. Digitalization was already happening but has been accelerated by remote working and online shopping, which has benefitted data centers. We also see ongoing demand for rental housing accommodation in mid-priced precincts, given the stretched affordability of buying a home. Our thematic focus over the last decade has been on ‘beds, sheds and bytes.’ We’ve been following these mega-trends and investing through the cycle, which has positioned us well, and laid the foundation for us to replicate this strategy through MIRA’s investment management platform going forward.
We have seen a lot of apocalyptic predictions about real estate, the death of the office for example. What is your take on these?
At the bottom of the cycle, you tend to get a lot of negativity and negative predictions. However, history shows that change is generally not that quick. We believe much of the impact on the office sector are hallmarks of the cycle rather than a broader thematic shift. As you would expect in a downcycle, corporates are reluctant to make decisions and there is an impact on demand. I’ve been working for three decades now and it seems that in nearly every single one of those decades there are pessimistic predictions about the office sector. However, companies realize innovation and building a corporate culture comes from working together in the office, at least some of the time. We’ve seen some big tech firms commit to significant office space because they understand this. There is little doubt net absorption will decrease over the short and medium term, but we’re not generally seeing cataclysmic outcomes. That said, there will be varying outcomes by location, reflecting in particular the level of supply and shifts to less expensive locations, and corporates diversifying their office footprints.
How are investors reacting to the new environment and how are they positioning themselves?
There is a general expectation that interest rates will stay low for even longer and because of that we are already hearing about, and seeing evidence of, an increased focus on real assets and particularly real estate. As we’ve seen in other downcycles, investors will take stock of their portfolios – factors such as liquidity, debt profile as well as their exposures to different sectors and how that is likely to impact on their performance. However, on the whole, we’ve found that most investors are fairly comfortable with their positions.
Investors are also taking on longer-term partnerships and strategies in sectors that have resilient cashflows and that also benefit from the structural trends which are being accelerated. Many of them were already moving along that path. For example, MIRA has significant investments in logistics platforms across the globe and we’re continuing to see strong demand for new investment into the assets that have been created by those platforms. Similarly, in the rental housing space we’re continuing to have active discussions, as well as in relation to data centers. Even within retail, convenience retail has held up – food sales and grocery sales have done well. So, it’s really more the traditional mall format that is challenged.
With this lower for longer interest rate outlook, we expect to see increased focus on prime assets across all sectors. In the last cycle, we saw a lot of the big investor names come back into the market quickly and reset pricing. We’ve already seen one of the large Asian-based sovereigns, for example, continuing to do deals and buying office buildings in Australia over the past few months. We also expect to see investors moving into more cyclical plays, especially in sectors such as retail or hospitality, which have been most impacted by covid-19 and will likely see more distress emerge as the covid-driven stimulus and support is removed. Given the amount of dry powder and opportunistic dry powder, we expect to see some reasonably significant transactions starting to emerge around some of those more cyclical sectors.
The PERE Global Investor 100 list remains stable, with familiar names at the top. Where might we see change in the future?
Investors have increasingly become more sophisticated in recent decades and ultimately more of the investment-grade global real estate stock is owned and managed by high-quality institutional investors and their partners and operators. As a result, there is less volatility in markets and we’ve also seen the largest investors maintain and consolidate their position. Pension funds continue to grow and particularly in countries with mandated pension systems, such as Australia, Canada and the Netherlands, we expect to see growth in underlying capital flowing into pension systems. Conversely, you would expect lower growth from oil-dependent funds, while oil prices are low, but of course they also have large portfolios which generate earnings that provide capital to re-invest. One trend we expect to see is the continued rise of Asia-based capital, as Asia is leading the world out of the downcycle. The region shows the best growth, led by China, and is generating wealth and growing its pension and insurance assets.