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 made an already popular sector even more sought after among investors. The pandemic has seen online orders surge, especially in previously niche areas such as grocery shopping. While yields for industrial assets were at record lows prior to the current crisis, investor demand has soared following various lockdown measures across European countries pushing ever more consumers to shop online. The positive tailwinds are compounded by increased concerns about the other two major sectors. Retail has been impacted strongly as most shops have been forced to close for several months, while the appeal of offices has been thrown into question by increased agile working practices. Industrial has therefore seen a far greater weight of capital targeting a limited supply of assets pushing yields to even lower levels than before.
Office: Office occupier demand is understandably running at record low levels. During periods of uncertainty, occupiers delay decisions. In the current crisis, there are further layers of uncertainty than we would typically expect in a traditional economic downturn. Aside from the economic challenges, there is the unknown future path of the virus, impacting how and when staff can return to the office. And then there are the structural implications of a potentially significant increase in agile working as a permanent trend. Vacancy levels are already rising across Europe, partly driven by new space completing which is not being taken up, but more significantly from the release of second hand space. This has been most acute in the UK, where subleasing is more common. In Europe vacancy rates are generally rising due to lease expiries or breaks providing occupiers with an opportunity to downsize their footprint in light of anticipated lower revenues, and/or an increase in agile working going forward. Insolvencies have remained relatively low thus far, but as government sup-port schemes are gradually eased back this is likely to rise as a contributor to vacancy rates. Despite these challenges, investors continue to target the sector, and assets in core markets with strong covenants and long leases are trading at pre-COVID levels. We would anticipate some downward price movements on assets as they move up the risk curve, particularly on the vacancy side. However the overall picture of the market is one which is distorted by the volume of capital which currently does not appear to be pricing in the risks which are faced on the occupational side.
Retail: The structural adjustment afflicting the retail sector has been accelerated by the pandemic, as shoppers have been forced to remain at home and shops commanded to close in most European countries. This has led to a greater use of online services, and as a result retailers which had not fully embraced e-commerce have suffered. Shop closures have been high and even successful retailers have taken the opportunity to close stores that are not as profitable. This has led to further downward pressure on rents and outward shift in yields with the expectation that the pain for retail will last into 2021. On a more optimistic note, there is hope that now the structural changes facing the sector will be brought forward and from 2022 onwards we are expecting retail to hit the trough and gradually recover. However, this process will only play out if landlords are dynamic in their asset management strategies and proactive in repurposing schemes with no future.
Global: TheCOVID-19 pandemic has had a significant impact 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 onthe 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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