The Covid-19 crisis now appears to be deeper and more widespread than initially estimated by financial markets, and it is placing a huge strain on the global economy. In this new and evolving context, real estate is likely to share in the economic pain in the short run, but could prove resilient in the longer term given its defensive features, including its ability to dampen volatility and bring diversification to portfolios.
Investors are already aware of real estate’s added value. The asset class has enjoyed impressive success over the last decade. Real estate markets have been growing strongly, bolstered by a low-rates environment and the subsequent ‘hunt for yield’ among investors. This growth should remain in place once the worst of the Covid-19 crisis is over, with government bond yields trending even lower across developed markets.
Investment flows have been boosting real estate markets all over Europe in the past few years: investment markets have proved healthy and valuations have benefited from a lack of supply that has pushed yields downward in the most sought-after locations. For leasing markets, office rentals have been supported by healthy labour dynamics across Europe. As the global economy suffers from the fallout of the pandemic in the coming months, there may be some upward pressure on yields, in particular for real estate segments and locations considered less resilient.
On a longer-term perspective, real estate’s defensive features and its well-known benefits for investors are likely to provide some immunisation from the crisis. Real estate’s dynamicsare driven by deep-rooted societal and demographic changes, including the rising focus on climate change. The high visibility on rental cashflows, especially for properties on long-term leases, is appealing to institutional investors. In addition, the persisting low interest rates have created a significant premium over most fixed income securities. Finally, should the current crisis lead to higher inflation, real estate may offer a good hedge as rents are indexed in most geographies and sub-asset classes.
A lot of uncertainties remain around the impacts of the Covid-19 crisis on the economy and financial markets, and also on real estate. However, some pre-existing trends could be strengthened by this unprecedented health crisis. For offices, there were many comments from the industry about how the widespread lockdown could dramatically change the way people work, with an overwhelming rise of smart working and wellness in offices. The same could be the case for retail and logistics, with the rise of e-commerce, together with the importance of supply chains and locations. Finally, it is our conviction that ESG investing is a long-term trend that is much valued by investors in real estate investing. Today, the environmental aspect of ESG is a must-have, with the integration of carbon footprint measurements coming on the back of high demand for climate change. The Covid-19 crisis could play a significant part in highlighting the importance of the ‘S’ pillar for social matters in ESG investing, including building new types of workplaces that aim to preserve employees’ health and improve employees’ networking.
Many developments are ongoing at the moment and it is difficult to make any accurate predictions. In uncertain times, asset managers must keep their eyes open to be able to jump on any opportunity and investors should stick to fundamentals as they prepare for the new cycle. Real estate investment has solid fundamentals that can help investors seize any opportunities arising from the fast-growing trends in offices, retail, logistics or ESG. We hope that reading this article will help investors forge some convictions around real estate fundamentals and longer-term dynamics.
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