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 COVID -19 pandemic has accelerated existing structural trends which have been benefiting the logistics market. A sharp increase in e-commerce penetration has supported record demand across European logistics markets. This has been further compounded by the strong recovery in the European economy in 2021, driving an increase in consumer demand and placing greater strain on supply-chains. Issues relating to the latter are one of the potential drags on economic growth in the second half of 2021, and having a well-connected logistics supply chain for manufacturers and retailers alike has never been more important. Reflecting the positive trends on the occupier side, investment sentiment has strengthened even further, pushing logistics yields to even lower levels, which has driven exceptional capital growth over the past 12 months. This has made it very difficult, or in some cases impossible, to find any real value in the sector and although our return forecasts for the sector are strong they are based on valuations of existing portfolio holdings. Once the premium required to acquire logistics assets in the current market is taken into account, the proposition looks less attractive. And whilst the occupier market is strong, logistics remains a relatively low growth asset class particularly where there is significant land supply to accommodate pre-let developments.
Office: The office supply-demand balance has moved in favour of the tenant in most European markets, with vacancy rates increasing sharply, albeit from a low base, and take-up falling back to GFC levels. The positive news is the economy has strengthened and many office-based employers are coming out of the crisis in a strong financial situation. Unlike previous downturns, the outlook for office-based employment growth has already turned positive again. But the curve ball in the market is the structural shift to an increase in home working. The reality is many companies will use this as an opportunity to offer more flexibility to their staff, and reduce their overall occupation in the process. This will take some time – companies will take a wait-and-see approach with staff returning and with most office leases running for several more years there will be no rush to make space reduction decisions. But it will come, and markets such as London City, where subleasing is commonplace, have already seen the vacancy rate far exceed the peak of the GFC as occupiers try and release space they envisage they will no longer require in the future working environment. We accept that genuine prime office buildings will be more resilient, as they will offer the features that corporates will need to attract staff back to the office and add value to that experience. However, the percentage of this type of stock which makes up the European market is small. Market commentators have been too focused on the small part of the market which will attract occupier demand in the coming years, whilst quietly not mentioning the majority of the market which is not prime and we believe will struggle.
Retail: The pandemic has accelerated the structural shift to e-commerce, which has caused and will continue to cause challenges across many European markets. However, we saw this as inevitable, even before the pandemic, and we are now reaching the point where there may start to be some value returning in retail markets. At this point in time, it is very selective – UK retail warehouses is the only main segment that we believe has already turned the corner. But it may not be too long before other European markets stabilise and with the outward yield shift that has occurred, could in some instances start to represent some relative value. The key determinant before going back into the sector will be whether the rents have rebased to a sustainable level that the retailers can afford to pay and remain profitable against a backdrop of further increases in e-commerce spending.
Global: The COVID-19 pandemic hashad 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 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; June 2021. Past performance is not a guide to future performance.
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