Whilst the pandemic has changed the way we live, work and play, it has resulted in emerging opportunities in the global real estate market.
Now is the time to take a look at your illiquid investments and consider whether you could benefit from emerging opportunities in global property.
Remember when you used to commute to the office almost every day? No? Neither can I (but I am concerned about that banana I left in my desk drawer last year). It’s fair to say that the world we live in today is almost unrecognisable from the world we lived in one and a half years ago. No market has felt this impact more than the real estate sector where even the very future of buildings has been questioned. The emergence of the home office, video calls and an increased reliance on e-commerce has led to some theorising that the way we use property in our everyday lives has fundamentally changed.
However, with change comes opportunity.
As with most asset classes, property is best accessed via a global approach as this provides the widest opportunity set for managers to take advantage of these opportunities.
The key emerging themes we explore below are:
- The emergence of e-commerce and the logistics sector, particularly in emerging markets;
- The case for high-quality offices located in global cities;
- Opportunities in “niche” sectors such as life sciences and medical offices which will benefit from the aging population and reliance on technology; and
- Residential property, primarily in cities that are set to urbanise significantly in the next 10-15 years.
The phrase ‘the Amazon effect’ has become common this past year
For those that haven’t heard it before, the Amazon effect refers to the disruptive effect of e-commerce on the physical retail market. In the UK, for example, logistics and warehouses have been the star performers for the past couple of years. However, in markets such as Asia and Eastern Europe, the penetration of e-commerce is less significant despite the pandemic. Although it is unclear how reliant we will be on e-commerce as the world reopens, it is now a staple of modern life. Only a few years ago ‘logistics’ was considered a new or ‘alternative’ sector in the property space but has quickly become a staple in property managers’ portfolios. Widening the opportunity set to the international market allows managers to access countries where there has been less penetration in these sectors, such as distribution centres in parts of Asia, and benefit from a first mover’s advantage as this market grows.
The office sector is polarising – some people can’t wait to go back to the office and others can think of nothing worse. Whatever your opinion, there has been a paradigm shift in the way we work. However, I believe there is still a compelling investment case for the office sector if one takes a broader perspective. In particular, there will continue to be a place for ‘flagship’ buildings located in global cities such as Berlin, Paris and Singapore. Collaborative ways of working and interpersonal experiences cannot be replicated over video calls and there are many areas of business where this is still essential. By taking a global approach managers can invest in offices that are well-adapted for agile ways of working, have strong ESG-characteristics, easy access to amenities and are in prime locations, such that they will continue to be used as the world reopens.
Beyond these well-established sectors, there is a plethora of nascent sectors that are set to benefit from emerging trends. As the population ages, there is an increased requirement for medical offices (doctor’s surgeries located near hospitals). Similarly, an increasing reliance on science and technology has increased demand for ‘life sciences’ offices and laboratories with access to specialist equipment. We expect these buildings to continue to be used as technology isn’t advanced enough for us to develop vaccines over Zoom – yet! Such opportunities usually require significant capital to gain exposure to them, as such they are only accessible to the largest investors with the scope to have niche allocations within their portfolios, meaning a global approach is the only way to gain exposure to these trends.
The undersupply and lack of affordability of residential property has been a persistent trend for decades now. This theme is only likely to become exacerbated as cities urbanise and the population continues to grow. Accordingly, there is a real opportunity for property managers to earn strong risk-adjusted returns in this sector. Not only this, but residential property also has a number of attractive characteristics in the context of a wider portfolio - its returns are largely derived from income and have low correlation with other property sectors, as was evidenced by its resilience through the Covid-19 pandemic. Global property funds have traditionally had an allocation of 15-25% to residential property, whereas it does not often feature in domestic mandates. In addition, our preferred managers have a wealth of local expertise which means they can fully understand domestic market supply and demand drivers.
Anatomy of a global property fund
Although we don’t know how the world is going to change (or what has happened to my banana) you shouldn't discount illiquids from your portfolio. A global approach to property provides investors with exposure to a number of attractive themes and a wide, diversified opportunity set. There are ‘off-the-shelf’ funds available that offer investors exposure to hundreds, if not thousands, of underlying properties across a wide range of geographies and sectors. In particular, for investors looking for growth rather than income (which has typically been the remit for domestic long-lease funds), we think there is a compelling case for an allocation to global property.