02 Oct 2024
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Real estate
Navigating
Navigating
the shifting
landscape of
real estate
With central banks beginning to loosen policy rates, the market is poised for a rebound, presenting new opportunities for investors who understand the nuances of the global markets and sectors. Shawn Lese from Nuveen Real Estate shares the impact of this new market on real estate and how this asset class remains at the heart of the modern economy.
With interest rates returning to their ‘old normal’ levels, real estate can again play its tried-and-tested role in a wider portfolio of providing diversification, volatility management, strong income and the potential for capital appreciation.
What is the current situation of global real estate investment?
Since the reversal of the low-interest rate regime in early 2022, we’ve observed a significant correction in real estate values worldwide. Europe has had the deepest fall in property values, followed by the US, while Asia Pacific has experienced more stability.
This downturn has been driven primarily by financial markets adapting to a new monetary environment. Despite this, real estate fundamentals, such as rental values and occupancy rates, have remained very strong, providing returns to investors through income. Although we saw a period of higher inflation, it has helped drive growth in the occupational market and has begun to recede around the world to a tolerable level.
With several central banks, including the European Central Bank, the National Bank of Switzerland (Sweden’s Riksbank) and the Bank of Canada, beginning to loosen their policy rates, we believe market values are set to bottom out around the middle of 2024. However, there are exceptions, particularly in the more challenged office sector in the US, which is facing structural changes.
This means 2024 is on course to be a strong real estate investment vintage, leaving the correction behind and benefiting from resilience and growth across many local markets and most property types. Instead of the tide of super-low interest rates lifting all boats, real estate performance will once again vary across quality, sectors, countries, cities and sub-markets. The formula for delivering investment outperformance is knowing the sectors and local markets and paying close attention to diverging cycles and local idiosyncrasies.
Why allocate to real estate in a portfolio?
The market reset of the past two years can be seen as a normalisation following a period of unprecedented low interest rates. Up until 2021, real estate was often used as an alternative to fixed income, with that asset class unable to provide sufficient cash flow in the low-rate environment.
With interest rates returning to their ‘old normal’ levels, real estate can again play its tried-and-tested role in a wider portfolio of providing diversification, volatility management, strong income and the potential for capital appreciation.
The globalisation of real estate markets has grown steadily over the last two decades. It is now easier for investors – even small investors – to build a global portfolio and take advantage of diversification and cycle arbitrage. Allocating to North American, European and developed Asia Pacific markets is within reach for most.
With elevated valuations in the stock market (and with real estate values having reset), global institutional investors are largely below their target allocation to real estate once again. As investors begin to reallocate to the asset class, this will provide support for values and begin to unlock liquidity as the transaction market becomes more active.
We’re seeing growing interest in allocating to impact investments, particularly affordable housing. In the US, Nuveen Real Estate is one of the nation’s largest, vertically integrated institutional managers of affordable housing. One of the biggest US defined-benefit public pension plans recently invested in our US affordable housing strategy, which seeks to support a broad range of positive social outcomes for residents and communities while generating steady, accretive returns.
How will this new market change real estate opportunities? And how can Nuveen help investors realise these opportunities?
Early in a new cycle, which we expect will begin this year, value-add investments are usually best placed to take advantage of any dislocations resulting from the market re-set and the new financing environment. But it’s also a good time to build a core portfolio at attractive entry pricing. The challenge for doing this is that real estate core returns are currently relatively moderate in the context of other asset classes. So, a long-term investment horizon is required.
Nuveen Real Estate’s ‘tomorrow’s world’ philosophy means we focus on property types expected to benefit from global megatrends – long-term, structural forces related to demographics, urbanisation and technology. This leads us to healthcare-related real estate, logistics and housing, and several niche alternative sectors, such as student housing, single-family rentals, data centres and self-storage.
Understanding how markets are maturing from one region to another allows for a range of strategies across real estate sectors. For example, it is critical to look at where and how city hubs are shifting, as well as how factors such as ageing populations and a focused push to decarbonise cities are affecting demand for different types of healthcare, housing, retail and office properties. Identifying these nuances within regional markets requires a frontline presence and the global reach to tap into and capitalise on these changing conditions.
Our sector-focused platform and local presence allow us to uncover these insights and create diversified portfolios for investors. We have developed deep market knowledge of each property type through cross-sector collaboration across regions and investment teams. This, coupled with our ‘tomorrow’s world’ philosophy, informs our long-term view of real estate investments. As one of the world’s top five real estate managers, we leverage our global scale to bring like-minded investors together.
What are the expected short-term risk factors and medium- to long-term prospects for the global real estate market? How can investors navigate these challenges and capitalise on opportunities?
Historically, investing just after a market correction has delivered the highest cyclical returns, so one could argue that the risks are low. The main risk, however, is if the economic recovery is weaker than expected and if interest rates remain elevated for longer than expected. This would dampen short-term return prospects, not just for real estate but for all investment types.
In the longer term, real estate remains a very well-placed asset class even as more aspects of day-to-day life become digitalised. It’s still the key ingredient of urbanisation, which remains a strong, unbroken trend in developing and developed countries. In light of increasing land shortages, restrictions on new developments in dense metropolitan areas and the fact that space can’t be digitised, real estate remains at the heart of the modern economy.
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Real estate investments are subject to various risks associated with ownership of real estate-related assets, including fluctuations in property values, higher expenses or lower income than expected, potential environmental problems and liability, and risks related to leasing of properties.