The risks of shortsightedness during market disruption

The private real estate industry has spent the summer laser-focused on near-term issues relating to the macroeconomic and geopolitical environments. Although typically focused on the long-term investment horizon, many players have been preoccupied with record-high inflation and aggressive interest rate hikes that have had material effects on the transaction markets in recent months.

Such a short-term focus, however, could lead investors and managers alike to be short-sighted in their approach to portfolio allocation and investment decisions as they position themselves for the next cycle, warned speakers at PERE’s inaugural virtual Global Passport event, PERE Connect, last week.

“I think there is a disconnect in this relationship between long term and short term. Institutional capital needs to be able to feel it can be in a position where it can really make long-term bets,” Tom Mundy, head of capital markets strategy and research at global brokerage JLL, told audience members at the session titled “Interest Rates, Stagflation, Ukraine.”

Mundy was joined at the event by Sabina Reeves, chief economist and head of insights & intelligence for CBRE Investment Management, and Kieran Farrelly, head of global solutions, real estate at Schroders Capital. The panelists pointed to a number of factors that are causing industry participants to potentially be missing the forest for the trees.

One area being overlooked is emerging or niche investment opportunities arising from demographic or structural shifts happening in the market. Growing aging populations in many countries have led to significant institutional investment in senior housing, and yet the senior housing segment of “high-acuity” nursing care is not being heavily targeted by institutions currently. Japan, for example, has more over-80-year-old retirees than those between the ages of 65-79, creating a long-term opportunity for investment in this property type, she said.

Opportunities may also be missed in some developing markets with strong population growth. An example Mundy gave is Nigeria, whose population is set to almost double by 2050. Based on current projections, the West African country is expected to rival the US in size by that date, with around 70 percent of its population under the age of 30. Although Nigeria and other emerging markets lack the mechanisms for investors to put capital to work in the same way as in developed markets, such demographic trends present a longer-term opportunity to consider, Mundy said.

“There has to be a discussion in real estate about how we manage this exponential population growth,” he said.

Meanwhile, some aspects of the technology revolution are not being considered. Farrelly said that the entire industrial infrastructure has been built with human tenants in mind. However, Oxford Economics contended in a 2019 report that around 20 million manufacturing jobs would be displaced by robots by 2030.

“For thousands of years, we’ve built real assets to cater to human tenants. A lot of them aren’t fit for purpose to deal with robots,” Reeves said. Logistics properties built for robot workers will need specific floor, height, energy and automation requirements, she explained. “We have a lot of work to do as an industry to create that kind of product.”

Although short-sightedness can mean overlooking a long-term opportunity, it can also refer to missing an opportunity to invest now. Although market uncertainty has led many participants to remain stuck in wait-and-see mode, all the panelists were in favor of managers and investors being active in the market now if they had the means. “There are great tactical opportunities out there right now because of all this disruption,” Reeves added.

Farrelly agreed, suggesting that investors and managers should take action in the current market environment. “I would be advocating, don’t just go risk off. Don’t hide in a shell,” he said. “If you just look historically, these sorts of phases are real opportune times to potentially go risk on.”