UBS Asset Management’s Real Estate & Private Markets (REPM) business has been investing in real estate for 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. Rising tariffs and trade renegotiations add uncertainty to the demand forecast for Industrial across North America. Change is unlikely to be immediate. Effects will vary by industry and region. Growth in business investment and a strong consumer would offset some negative effects from adjustments to new trade policies. Positive expectations for the US economy and a maturing e-commerce market will likely keep industrial in favour with investors and lenders.
Office: Office fundamentals are in a slow and stalled recovery, supported by strong job growth and profitable businesses and 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 used to; emerging office tenants, like high-tech 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 spike in 2018. Positive economic and labour market growth should lead to absorption of most but not all of the new space. Expect some increase in vacancy with softer income growth at the property level. If economic growth continues, office fundamentals should improve by late-2019 as supply subsides.
Retail: Retail sector fundamentals continue to improve albeit at a slow pace given the highly-segmented nature and structural headwinds facing the sector. With low unemployment and expanding 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 are healthier than their lower-quality counterparts, though the overall occupancy rate of the lifestyle mall sector is around 94%. On the supply front, construction has been low since the recession, as retailers slow net store openings in the face uncertainty about the balance between physical store presence and e-commerce. Looking ahead, slowly dropping vacancy rates and steady demand should support positive but slow rent growth over the coming years for investable-quality retail properties.
Global: The resilient appeal of global real estate is driven by a number of factors: low, albeit rising 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 has caused a surge in transactions. 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 given the interest rate outlook.
Total returns globally continue to reduce as a result of reduced yield compression and capital value growth. Construction is starting to pick up, but 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, meaning returns are not driven primarily 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.
Historically, rising interest rates have coincided with strengthening property returns, thanks to an improving economy and rising rents. This time is different: property returns are slowing as rates rise because a 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 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.
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News from IPE Real Assets
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White Papers / Research from UBS Realty Investors LLC (Real Estate)
Income growth drives return as appreciation moderates.
Expect another six months of softness for US office fundamentals.
Income continues to be the leading driver of US commercial real estate performance, a change that has taken place gradually as the real estate sector transitioned from recovery to expansion over the past two years.
US Real Estate Market: March 2017 download
Investable real estate fundamentals appear poised for relative balance in 2017, lining up with long-term positioning expectations.
US Real Estate: Outlook 2017 download
We are pleased to present our firm’s US Real Estate Outlook 2017, combining the efforts of our multi-disciplined Strategy Team and data-focused Research & Strategy groups.
Analysis from IPE Real Assets
Core real estate funds in the US are underweight logistics assets. But not for want of trying, writes Christopher O’Dea
Valuing estate funds on a fair-value basis can introduce financial market volatility out of kilter with the stable cash flows. Anthony Shayle, Paul Guest and Zachery Gauge explain