UBS Asset Management’s Real Estate & Private Markets (REPM) business has been investing in real estate for over 75 years, having launched its first real estate fund as early as 1943. Since then, the business has grown steadily, expanding the universe and scope of its real estate investments and adopting a truly diversified business model. On an assets under management basis, the business is one of the leading global real estate investment managers today. REPM’s capabilities include core, value add and, increasingly, opportunistic strategies on a global, regional and country basis.
These are offered through open- and closed-end private (unlisted) funds, fund of funds, individually managed (separate) accounts, REITs and publicly traded real estate securities globally. The business actively manages direct investments in the hotel, industrial, multi-family/residential, office and retail real estate sectors, as well as in farmland in the US – a business that specialises in the acquisition, management and disposition of agricultural real estate investments.
Industrial: The surge in warehousing needs is underpinned by a few factors. Firstly, countries and companies are increasingly safeguarding the integrity of their supply chains by engaging in near- shoring and on-shoring, which has led to greater demand for storage space domestically and regionally. Secondly, the exponential growth in e-commerce and the drive for efficiency have resulted in end-users struggling to keep pace with the parallel rise in warehousing requirements. Thirdly, warehousing costs typically make up less than a third of total logistics costs for operators, with transportation costs driving another 50%. This means that it is cost-effective for end-users to pay more for higher quality and better located logistics space, and achieve cost savings on transportation. As much as margins are low in the e-commerce space, logistics rent growth is still possible, albeit marginal. Lastly, we are seeing a cut-back in the supply of industrial land across APAC, and that has really pushed up the rents and capital val- ues of logistics assets, especially the well-located ones. Japan, South Korea, China, and Australia are the few markets that will see better availability of modern logistics assets, and investment activity will likely be centred around these markets in the next few years.
Notably, we have also seen increased activity in the niche sub-segments of the logistics sector, due to the chase for returns as well as structural changes in occupier demand. The share of total logistics investment volumes of cold storage warehouses, data centres and R&D facilities has grown exponentially in recent years, although it still makes up just a small proportion of overall transaction volumes. The runway for growth is long, and investors will do well to increase their exposure to these emerging segments to ride on fundamental shifts in long-term trends.
Office: Most APAC office markets continued to see weak performance. Despite that, demand for office space is expected to reverse into positive terri- tory across most markets by the end of 2021. A year of turmoil has led to some increase in secondary and shadow office space, and office tenants are now more cost conscious. These will still be key drags on overall rent performance. The markets where we saw the biggest rent corrections are markets in which prime rents have had a huge run-up over the past few years, such as in Sydney. With limited supply expected in 2021 and 2022, the Tokyo office market will have the breathing space to cope with the emerging secondary vacancy later this year. New-economy occupiers, such as those in the technology and media sectors, will continue to satisfy their deep appetite for office space in China and Singapore. Across APAC, high quality office assets have maintained tight vacancy rates and have proved to be more resilient. Looking forward, ageing office buildings in less sought-after locations may suffer more in the medium term, especially as occupiers put an added focus on the wellness of their employees.
Retail: We think the glass is half full in the much-maligned retail sector. The pandemic has separated the wheat from the chaff in the retail space. There is still significant headroom for e-commerce penetration in APAC, which is not supportive of retail. However, the prospects for retailing lie at the two extreme ends of the spectrum, namely essential retail and prime retail. Every other retail format in the middle of the spectrum has and will be disrupted by the growth in online share of spending. Disclosure by public REITS around the region tells us that non-discretionary retail has performed relatively well before and during the pandemic, and that will still be the case after the pan- demic. On the other end, the outlook for prime retail is likely to improve once borders are reopened. The downside risk is the uncertainty around that time- frame, but astute investors can start to identify assets which have seen signifi- cant re-pricing and embark on value-adding strategies to adapt to the evolving retail formats and habits.
Global: The COVID -19 pandemic has had a significant impact on the global real estate market. Real estate values showed a small decline over 2020 as a whole, but held up well given the magnitude of the economic downturn. The market has been supported by swift and sizeable intervention by central banks and governments. The rotation online across the economy has affected most parts of the real estate market. Bricks and mortar retail has suffered as online shopping has been further turbo-charged, while demand for the logistics facilities needed to fulfil online shopping orders has increased. Offices have been impacted by the switch to mass home working and we expect this to continue to have an impact even once the pandemic has passed. Construction has been constrained and broadly the supply-side response has been muted this cycle, particularly in Europe. There was a significant drop in real estate transaction volumes in 2020, due to uncertainty over pricing and as travel restrictions and social distancing requirements impinged on the transaction process. However, in 2021 transaction activity has recovered as economies have re- opened. In the first half of the year real estate markets showed a strong, albeit highly polarised, performance driven by the industrial sector. The resilient appeal of global real estate remains, driven by a number of factors: ongoing low bond yields; the hunt for steady income; the importance of asset diversification; and a need for stability. Income returns tend to be quite stable over time, both within and across markets, while capital growth can vary tremendously depending on a market’s stage in the cycle. Global real estate remains attrac- tive relative to other asset classes in the sustained low-rate environment and provides the income and low volatility which many investors desire. Lower leverage and less exuberant pricing for lower quality real estate also means the asset class is less at risk than in the last cycle.
Source: UBS Asset Management, Real Estate & Private Markets; June 2021. Past performance is not a guide to future performance.
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