Real estate
Shifting to the post-pandemic world
The economic recovery and low interest-rate environment should be favorable for real estate investments in 2021, even though COVID-19 represents an ongoing challenge for certain market segments. We favor sectors underpinned by structural growth such as industrial and logistics real estate.
The projected environment for 2021 – a continuing economic recovery combined with historically low interest rates – is favorable for real estate in general. With valuations in listed markets still below pre COVID-19 levels, we expect the asset class to deliver positive, mid-single-digit returns in 2021. The outbreak of COVID-19 and ensuing lockdowns affected the various segments of the real estate market very differently. Whereas accelerated growth in e-commerce and the trend toward working from home are likely to also negatively affect demand for retail and office space in 2021, logistics and industrial real estate continue to be among the major beneficiaries of the crisis due to increased demand from online retailers. In addition, data centers and communication towers benefit from rising data usage as employers enable their staff to work from home. As a result, applying a sectoral view has become even more important when investing in real estate.
Prefer US listed real estate
We currently favor listed over direct real estate due to more compelling valuations. Within listed real estate, we prefer the US market, which has a higher exposure to logistics and data centers, as well as to defensive sectors such as self-storage. In the UK, listed real estate companies are trading at a large discount to net asset values (NAVs), but the outlook will ultimately depend on how the Brexit transition evolves. Eurozone real estate is a defensive market due to its 70% exposure to the German residential market, which continues to be supported by structural undersupply and would benefit from the likely abolition of the rental freeze in Berlin in 2021. Swiss real estate funds should remain supported by the low rate environment and high exposure to the residential market. However, already rich valuations are likely to limit further price upside in 2021. Investors should expect a distribution yield of about 2.5%.
Direct real estate: Not out of the woods
While share prices of listed real estate companies react quickly to market news, valuations in direct markets lag due to their appraisal-based nature. We therefore believe that property values in direct markets are likely to correct further as we move into 2021, especially in structurally challenged sectors such as office and retail. We prefer core strategies that invest in a diversified portfolio of good quality and centrally located properties, as well as strategies with a higher exposure to the industrial and residential sectors given their more defensive nature. We also believe that strategies focusing on sustainability (e.g. green building practices) and societal trends (e.g. redesign of office buildings offering greater personal space, recreational areas, etc.) will benefit in the long term.
