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: Historically high demand is supporting industrial fundamentals with availability rates closing in on 20-year lows and rental growth well above average in many markets. New development is increasing, which suggests that rents will grow at a slower pace next year. There are a series of tradeoffs on the demand side. Rising tariffs, trade uncertainty, slowing growth in global economies and US manufacturing could offset some of the demand generated by the expanding e-commerce segment. Change is unlikely to be immediate. Effects will vary by industry and region. Positive expectations for the US economy, supportive consumer spending and a maturing e-commerce market will likely keep industrial in favour with investors and lenders.
Office: Office fundamentals are in a slow recovery, supported by strong job growth and profitable businesses but hampered by structural changes in demand. Shifting conditions in the growth of office-using employers temper the possibilities for faster growth. Publishers, advertisers and commercial banks are not adding jobs like they once did. Emerging office tenants, like hightech and labs, are growing quickly but are too small to overcome lacklustre demand from behemoth traditional tenants. Delivery of new office buildings is expected to remain just below average; yet, capital expenditure requirements are increasing for US office buildings. Rising costs to add amenities and release vacant space will likely support income growth but not cash flow. If economic growth continues, office properties should experience level vacancy rates and inflationary income growth.
Retail: Retail sector fundamentals continue to face structural headwinds from changing consumer preferences and expanding purchasing channels. With low unemployment and moderate debt burdens, consumers are spending money and should continue to drive growth in retail sales. Demand for space is expected to continue at a modest pace for neighbourhood, community and strip centres, supported by improving incomes and tightening labour markets. High-end malls perform better than their lower-quality counterparts; yet, uncertainty about the cost to transition to more mixed and entertainment uses is likely adding upward pressure on cap rates. On the supply front, construction has been low since the recession, as retailers slow net store openings in the face of uncertainty about the balance between physical store presence and e-commerce. Looking ahead, income growth is likely to be flat but with a wide range around the average.
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 sustained 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 2019. Past performance is not a guide to future performance.
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