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: E-commerce and supply chain efficiency continue to drive demand for industrial space across Asia. Particularly in Singapore, and in the tier one cities in China, the demand dynamics of the industrial and factory space segment have shifted towards built-to-suit and well-specified industrial and business park space. In the logistics segment, there is a growing inclination towards smaller infill space in markets where there is a high and rising proportion of online sales from businesses to consumers, and an increased focus on same-day delivery as a unique competitive edge in the crowded e-commerce segment. It is becoming increasingly apparent that on a bottom-up basis, higher quality industrial space will continue to deliver favourable rent growth and occupancy in Asia. The region’s developed markets of Australia and Japan will continue to see healthy levels of liquidity with investors attracted to the sector’s defensive and secure long-term income characteristics.
Office: The trickle-down effects of the recovering global economy have led to vacancy rates tightening to record or near record low levels in a number of markets. Most of developed Asia continues to see stable job growth which is translating directly into positive net absorption by office tenants in traditional industries such as finance, professional services and FMCG (fast-moving consumer goods). To that end, Hong Kong, Singapore and Tier 1 cities in China all saw healthy net absorption. In particular, with office supply cycle in Singapore having peaked, it is likely that the market is in the midst of a cyclical upturn. In Australia, rent growth is expected to remain healthy (in the Australian ex-resources markets) over the next two years in an environment of steady leasing demand, low vacancy and conversion of Grade B stock into other uses. The Sydney office market is set to remain one of the stronger performing markets on a global basis, particularly for existing owners where rental growth is now supporting valuations. In Tokyo, there are early signs that the market may soon feel the impact of impending Grade A supply, with longer rent-free periods being granted to large occupiers. However, on a relative basis, Tokyo’s office market is still one of the tightest in the region.
Retail: Retail property performance across Asia Pacific remains mixed. Demand for prime and CBD retail space has been steady in key cities and markets in Japan and Australia, supported by inbound tourists and demand from international retailers. High street rents in the prime areas of Tokyo remain in growth mode, as limited new supply of prime retail space provides the support for rental uplifts. The situation is similar in Sydney and Melbourne where low vacancy continues to underpin the resilience of prime retail. The emergence of the middle class in Asia, in particular China, has created a new retail driver in the form of tourist spending. Domestic consumption in most of Asia is veering towards non-discretionary spending and food and beverage. This is where the impact of e-commerce has been more muted in Asia (excluding Australia), because the dense nature of cities insulate the suburban malls from a direct substitution effect from e-commerce.
Global: The resilient appeal of global real estate is 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. Unconventional monetary policies in the form of quantitative easing and ultra-low interest rates have, in recent years, boosted the relative appeal of the asset class, while the consequential increase in capital flows caused transactions to surge. Moreover, in 2019 monetary policy has switched back to easing, with cuts in interest rates as the economy has weakened. Investment volumes are now down from their peak but remain in line with long-run averages. This continued strength reflects a reluctance to let go of assets given uncertainty as to how to re-allocate capital attractively. Many markets present a price gap between buyers and sellers, with owners of real estate, even with leverage, generally under no pressure to sell, while buyers are not willing to pay ever higher prices. Total returns globally continue to reduce as a result of reduced yield compression and slowing capital value growth. Construction is constrained and broadly the supply side response has been muted this cycle, particularly in Europe. In the best locations, this has meant good levels of rental growth, though returns are now primarily being driven by income. Differentiation in projected total return between markets and sectors is narrowing as the cycle extends. 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. The period of exceptional capital value growth driven by ultra-low interest rates and excess liquidity has come to an end. Nevertheless, global real estate remains attractive relative to other asset classes in the sus- tained low rate environment and provides the income and low volatility 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. Returns have certainly reduced but remain in line with the long-term returns one should expect from institutional property.
Source: UBS Asset Management, Real Estate & Private Markets; September Pension assets 46.7% 2019. Past performance is not a guide to future performance.
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