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 dichotomy between sub-segments within the industrial sector is very clear. Even in most of Asia Pacific where economic and industrial activities are stirring back to life, weak global demand is an overwhelming headwind for manufacturing and trade reliant countries. The US and Europe are amongst the biggest exports markets for Asia industrialists, and until the COVID -19 situation improves in other continents, industrial production and storage is likely to remain soft. This puts a dampener on overall rent growth in the industrial sector even as the e-commerce storyline hogs the limelight. That said, we did not see entire supply chains migrate to Southeast Asia in 2020, as was widely anticipated, and much of the high value-add production remains rooted in developed Asia.
Outside of China, Asia Pacific countries have relatively low online penetration rates, and that means the growth headroom for logistics is high in the region. In many APAC cities, demand is also coming from food manufacturers amid a rising trend of food delivery services, and the need to centralise and automate due to high labour costs and retail rents. Competing uses of land have reduced the amount of space available for the industrial sector, thereby providing an impetus for rent growth in places (such as Australia and China) where stock has been tightened rapidly. Ultimately, the appeal of the logistics sector is structural but competition and interest peaked way before COVID-19, rendering it tricky to execute given the lack of meaningful stock and land in most Asia Pacific markets. It is insufficient these days to talk about logistics in generic terms. As the trade tensions in 2019 and the pandemic in 2020 have shown, countries now are convinced about accelerating the reshoring and on-shoring of production lines, and stockpiling of resources for food security. What this indirectly implies is that, there will now be a need for more specialised logistics assets which are able to perform the roles of storing and moving perishables and even pharmaceutical products across the domestic markets.
Office: To be sure,corporates started 2020 on a wary footing,with most companies in Asia having experienced significant volatility in earnings owing to the prolonged trade tensions between China and the US in 2019. Hence, many service sector and old economy tenants did not overextend themselves in terms of office space requirements, which also means a lesser need to rationalise even with the virus outbreak in the year ahead. New economy occupiers, such as those in the technology and media sectors, will continue to display appetite for office space. China provides a glimpse of what is to come in other APAC markets as the lagged effects of the pandemic and global slowdown manifest in the office sectors in the region. What we do observe is not a widespread weakness in occupancy nor sharp rent declines but rather a pullback in leasing activity and increase in space surrenders in some markets. Despite governments offering concessions and throwing multiple lifelines at the corporate sector, it is certain that no one can swim against the tide should the outbreak persists.
Retail: The retail sector is precariously standing on one leg, relying solely on domestic consumers as international travel looks to remain curtailed going forward. Domestic consumption can only go that far in supporting prime retail. However, the danger is in writing off retail altogether when well-located malls with stores and services that cater to consumers’ needs are still a core part of the physical landscape. The hard part is figuring out what works in an ever-evolving retail scene. Even with e-commerce, it is not a one-way migration of consumers from offline to online – observations in Australia suggest that having a web presence also increases physical footfalls and in-store purchasing activity, a trend which is now deemed as Research Online, Purchase Offline (ROPO). E-tailing giants in China are also showing huge appetite for offline expansion as they create a ‘boundary-less’ retail environment. Low vacancy is underpinning the defensive qualities of dominant neighbourhood centres in Australia and suburban malls in Singapore, HongKong and China. The dense urban layout of most developed Asian cities means that retail offerings are mostly a stone’s throw away from most residential areas. What this means is that the need for disruption on physical retail by e-commerce is less flagrant. Investors can focus on non-discretionary retail, such as suburban malls and even wholesale markets which are supported by wide residential catchments and strong growth in non-discretionary domestic spending.
Global: The COVID-19 pandemic has had a significan timpact on the global real estate market. Real estate values have shown some declines 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 has been a significant drop in real estate transaction volumes in 2020 due to uncertainty over pricing and as travel restrictions and social distancing requirements have impinged on the physical part of the transaction process. Looking forward the outlook depends very much on how the virus evolves and its impact on the economy. A vaccination becoming available should curb the pandemic and allow the economy to recover, which would be supportive of real estate markets. However, 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 attractive 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; September 2020. Past performance is not a guide to future performance.
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