UBS Asset Management’s Real Estate & Private Markets (REPM) business has been investing in real estate for almost 80 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, multifamily/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.
2022 marked a turning point for the global real estate market as sharp rises in interest rates to combat inflation at multi-decade highs started to feed through. Higher interest rates hit real estate markets from the middle of the year and real estate transaction activity dropped sharply as the market started to re-price. The UK led the correction, suffering significant capital value declines, followed by the rest of Europe, while valuations in the US adjusted more slowly and with a delay. In Japan, real estate capital values have not been subject to the same downward pressure as interest rates there have been kept on hold. The adjustment in the market continued into 2023, with yields continuing to increase and capital values continuing to decline. The banking sector stress in early 2023 saw lending conditions tighten, which impacted debt refinancings and securing debt for new investments. The correction in the market has led to attractive discounted and distressed opportunities for investors looking to deploy capital. We are cautious about the office sector due to the impact of hybrid working and the large capex expenditure needed to make some older offices energy efficient. However, offices used for lab space have been a growing area of interest to investors, with strong fundamental demand from occupiers driving the sector. Residential also has strong long-term prospects due to underlying housing shortages. Following near-term price declines, we think the long-term market dynamics are also positive for industrial and logistics.
Warehouses continue to see robust demand with structural tailwinds such as rising e-commerce penetration. Rental growth stayed positive albeit moderating as supply catches up. Australia has been the star performer, being the only APAC market still experiencing double-digit rental growth on the back of supply shortages. This helped to support stable capital values in the country despite sharply higher cap rates in 2023. In other APAC markets, excluding Japan, rental growth similarly provided a cushion amidst rising cap rates. Japan remains an outlier with stable cap rates due to its loose monetary policy. We remain positive on the sector’s long-term growth potential.
The office sector is facing both structural (hybrid-working) and cyclical (macro slowdown) headwinds. This narrative is global, but we believe its extent is smaller in this region. APAC is leading both the US and Europe on the back-to-office trend, partly driven by cultural differences and dwelling sizes. Singapore and South Korea are better positioned given limited new supply and low vacancy. Japan’s leasing activity is improving though near-term supply is elevated. Australia is the weakest in the region with high vacancy rates of low- to mid-teens. Nonetheless, Australia rents are still rising due to inflation pressure. Across APAC, high-quality office assets have maintained tight vacancy rates and have proven to be more resilient. Looking ahead, we expect assets with good amenities, location and ESG ratings to outperform. Old buildings in less core areas are likely to suffer more in the medium term.
The COVID-19 outbreak has shifted individual behaviour and perception of living space. Flexible working arrangements are here to stay and offer an increasingly competitive edge to employers. This will likely continue to reallocate the real estate space requirement from office to residential. The modest construction activity during the pandemic has exacerbated the supply shortage situations. Residential rents are rising and have proven to be a good inflation hedge historically. We see secular demand drivers including shrinking household sizes and falling housing affordability. This asset class is well established in Japan, and Australia is starting to see significantly more capital commitments in this sector.
Valuations are less demanding for retail assets due to its past underperformance. The risk of cap rate expansions is more muted as a result. In the near term, retail sales are also supported by a rebound in inbound tourism. Beyond that, however, we think the sector’s growth appeal is lacking. Domestic consumption has so far been resilient, but its outlook is increasingly challenged by macro uncertainties. Rising e-commerce penetration remains a key structural concern. We think non-discretionary trade should stay resilient. Experiential retail is an increasing focus to attract foot traffic, and this could increase capex needs for retail landlords.
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