Duncan Owen, Global Head of Real Estate, commented:
“One of the striking features of European commercial real estate at present is that values in different sectors are not just moving at different speeds, but in opposite directions. Investors must follow not one real estate market, but instead several. The biggest divergence is between retail and warehousing (industrial). Indeed, market fragmentation – a key theme of 2019 – is something we expect to persist next year.
“In Europe, we continue to like office space in ’winning’ cities; those with diverse economies such as Amsterdam, Berlin, Copenhagen, Paris, Munich, Manchester, London and Stockholm. Vacancy rates in many of these cities are at their lowest in 15 years and although development is increasing, it is unlikely to halt the growth in office rents. London faces some uncertainty due to Brexit, but there our strategy is to focus on areas which have a bias towards tech, media and life science occupiers – such as Bloomsbury and Shoreditch.
“The retail sector is difficult. The real opportunity is to convert redundant retail space into other uses including hotels, offices and residential. That should be viable in locations where there is demand from competing uses. We see good potential to re-develop old stores in city centres and retail parks in affluent parts of southern England. It will be much more difficult to re-purpose secondary shopping centres in towns and cities with weak economies.
“In the US, we believe a key market theme will be the move from ’big to small’. Property markets outside of the “Big 6” (Boston, New York, Washington DC, Chicago, San Francisco, and Los Angeles) should provide a primary source of stable income growth and protection from overvaluation concerns. Performance differences will be driven, in large part, by migration and demographic trends and corporate economic development, combined with existing positive commercial real estate fundamentals.”
Ji-Eun Kim, Head of Private Asset Manager Solutions, commented:
“Private debt has been one of the fastest growing asset classes in private assets. Sovereign wealth funds and large state pensions were amongst the earliest adopters, but increasingly the rest of the institutional investor world has followed suit. Private debt’s self-liquidating characteristics and enhanced cash yield are especially attractive in a low-return environment. In addition, the withdrawal of banks from loan activity after the financial crisis, along with more mature relationships between companies and direct lenders, has led to a wider array of opportunities. However, the growth has attracted new lenders, increasing competition and a build-up of dry power. Caution around less favourable pricing and credit terms has risen.
“Though 2019 saw easing of senior loan issuance globally, the market remained borrower-friendly and expected to be so in 2020 given the competition among lenders. With pressure to deploy capital increasing amid signs of slowing economic growth, we believe investors need to prioritise manager quality and maintaining diversified private debt exposures across regions and industries. Investors should also seek lenders with differentiated origination approaches – the type and source of the loans – and scrutinise their credit expertise and underwriting practices to gauge a portfolio’s resilience in a downturn.
“As a relatively young asset class, many private debt managers did not exist prior to the financial crisis. Lenders with a track record of working through market stress, with the organisational infrastructure and scale to shift resources for troubled investments, are more likely to deliver during the next down cycle.”