As the demise of the office component in real estate allocations continues investors are favouring data centres, warehousing and low cost accommodation.
Office and bricks and mortar retail have suffered most at the hands of the pandemic. However, the pandemic-triggered impact on real estate from working from home and buying online varies across regions. For example, UK department stores and malls have been hit harder than their German counterpart, typically characterised by a grocery anchor.
Offices able to offer sought-after locations which help companies showcase their brand will thrive most. Moreover, offices in cities like Tokyo, where many employees’ preference is to come into work rather than work from home, will also thrive. In contrast, demand from office space in city’s like San Francisco, where most workers are now fully remote will stay weak. London offers opportunities for office investors. The pricing is much softer on a Brexit discount compared to other European capitals.
“The GFC offered an opportunity to get into London, now we are seeing the same thing,” said Tony Brown, global head of real estate at M&G Real Estate. Speaking at FIS Digital, he argued that investors should distinguish between offices that are magnetic and able to draw employees back with a better offering, from those that are mandatory.
It is important to view the current challenges in real estate in the context of the asset class’s evolution. For example, data centres and logistics overtook bricks and mortar retail a while back just as the listed equity giants of old like oil groups and big banks have also lost their crown.
“We haven’t been that positive on office for a while,” said Jon Cheigh, chief investment officer and head of real estate at Cohen & Steers, who estimates a fall in demand for office space of between -2 per cent to -10-15 per cent.
This was a sentiment echoed by fellow panellist Andrew Palmer, chief investment officer at Maryland State Retirement and Pension System. Overseeing a $7 billion allocation to real estate – $1 billion of which has been committed to managers over the last 12 months – he told delegates that the pension fund has been underweight office for while.
“It’s a difficult asset to release; it’s very expensive to make changes.”
Retail opportunities will shift to residential areas. Similarly, people are moving further away from their places of work, triggering a decentralisation in GDP and creating opportunities around major cities.
Maryland has structured a concentrated portfolio to core managers with allocations including storage and properties with lower price points like multi-family and workforce housing. Single family rentals and senior housing are also in the portfolio, and the allocation to industrials was recently ramped up.
However, investing in real estate alternatives like student accommodation or multi-family units requires investor patience and local knowledge.
“It’s difficult to invest in markets where you don’t have local experience,” said Palmer. “There are sectors we want to emphasise in the portfolio but we are not taking advantage of distressed assets; we are not sure they will return to peaks.”
Investors have flocked to warehousing and cloud computing facilities – both sectors that were initially found in the listed market. It’s behind the current trend of big money investors pivoting their sector composition and using the listed market to access real estate segments like large data centres and healthcare companies, said Cheigh.
“We are seeing investors selling billion dollar office buildings and shopping malls and deploying into self-storage facilities They are going from big assets to aggregate in a bunch of small assets.”
Logistics low yield
Money has poured into logistics and yields are now notably lower. Although panellists noted some opportunities exist globally in logistics, appetite for logistics has waned.
Instead, investors should focus on healthcare, self-storage, data centres and towers and selective office and retail opportunities.
Real estate and infrastructure investors are often competing for the same assets with assets like data centres and cell towers crossing between the two buckets. It is a symptom of more money chasing fewer opportunities and investors becoming more active and flexible. It’s also a symptom or real estate’s evolution from just being viewed as “shiny” buildings, concluded Cheigh.
“Ultimately, investors want a physical asset with positive supply and demand trends. It doesn’t have to be shiny and beautiful.”