Opportunities and positioning
Global economic and region-specific risks such as Brexit appear to have receded. At the same time, the two main risks for real estate markets (oversupply and excessive debt levels) do not appear present. This means we continue to see value in real estate markets, especially in terms of income generation.
Pockets of the retail market are proving unloved by occupiers and investors alike, with changes in consumer patterns, e-commerce and technological advancements dramatically challenging how, where and when we consume. The office sector is adapting to the growing presence of flexible space operators and a more discerning tenant base; but overall demand and real estate performance has been challenged by economic headwinds and limited development.
We continue to favor defensive growth areas that produce solid income. In particular, we like alternative real estate sectors such as medical technology locations (which benefit from a global aging population), data centers (which should benefit from the launch of 5G networks) and multifamily housing (as co-living trends are on the rise).
Across all sectors, we are putting environmental sustainability at the forefront of our investment strategies and asset management initiatives.
Commercial real estate debt in the U.S., U.K. and Australia continues to offer good risk-adjusted returns. Demand for funding is high in these markets but supply from traditional lenders (such as banks and insurers) remains constrained. CRE debt can provide diversified, stable income streams while delivering some downside protection.
Risks to our outlook
Risks of an unexpected rise in interest rates has waned. But a material economic slowdown would hurt real estate.
We are also focused on political risks associated with the U.S. elections that could result in additional rent or commercial property regulations. Regulatory changes in some European housing markets could also present risks.
Portfolio context for real assets and real estate
Global real assets and real estate, particularly those not correlated to downstream commodities, are a good source of idiosyncratic risk, which helps embed more diversification into portfolios.
Given our expectations on the business cycle, we think long-term rates have limited room to rise significantly from here. We like public real estate and real assets as a defensive growth alternative to market-cap-weighted indexed equity exposure that also provide a hedge against an upswing in inflation expectations from current low levels.
Real assets can provide income for institutional portfolios. We prefer sourcing income in real assets as opposed to lower quality corporate debt.
Liquidity remains a concern. Given that private market access is a key requirement for many sectors of the real estate and real asset markets, we recommend investors maintain their long-term strategic asset allocation split between public and private assets.
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