This prompts the question: how should property investors position for an economic recession? Paul Guest, Research & Strategy at UBS Asset Management Real Estate & Private Markets (REPM) answers:
“In the past, recessions often combined the peak of development activity with a drop in tenant demand. Real estate used to be more highly levered and declining capital values led to defaults. As a result, investors were advised to de-risk by moving towards core and long income streams. Despite the economic recovery since the GFC office development remains relatively muted, and the current supply shortage limits the downside risk of a widespread rental fall. As businesses are likely to focus on their core activities while incorporating tighter ESG standards at the same time, investors should de-risk their office strategies to core locations and ESG-compliant assets.
“As the retail sector is in structural flux, leading to shorter leases at a time of slower growth, it has become more difficult for investors to de-risk, leading to historically low allocations. Logistics benefits from the challenges in retail, but is challenged itself by the decline in manufacturing. The evolution of supply chains supports investment in more recession-resistant urban sites. Investments like residential, senior housing and medical offices play on the more predictable demographic developments, and despite increasing regulatory pressures provide more predictable income during an economic downturn. As real estate as a whole is less levered than pre-GFC, interest rates remain low, and the banking sector is more tightly regulated, lower risk debt can also provide recession protection.”
Allocations to real estate remain high. What is the next source to drive global capital flows? Paul Guest, Research & Strategy at UBS Asset Management Real Estate & Private Markets (REPM) answers:
“Dry powder for private equity real estate was estimated to be in excess of $ 320 billion at the start of 2019. This sum is unlikely to reduce much in the year ahead, particularly in a low rate environment where real estate is relatively attractive vis-à-vis other asset classes. We expect cross-border investors to remain active in 2020. The key market participants remain the insurance companies, pension funds, and sovereign wealth, with most taking a long-term view on core investments.
“The growing fiscal burden of deteriorating demographics across the globe is hastening the search for higher-yielding income-producing investments. This is unchanged from recent years, with the subtle difference being an ostensible urgency to deploy into real estate. We anticipate that Japanese pension funds will dip their toes deeper into direct real estate in 2020. This has been a very gradual process.
“Anecdotal evidence suggests that Japan’s institutional funds have made substantial allocations and are focused on the mature core markets of the US and Europe. In addition, the tremendous wealth creation experienced in the last decade has led to many family offices, particularly in Asia and the Middle East, looking to deploy systematically into global real estate. We believe this will continue in the year ahead.”