Higher real estate investment volumes and reaching “peak rate” in central bank policy rates are among the expectations for the property market, hears Piyasi Mitra.
Carlo Maggi, Head of real estate & infrastructure strategies, Eurizon Capital Real Asset
Which categories and regions do you find most promising in real estate investment, and what do you recommend avoiding?
Selectivity is the pillar of our strategy, both in terms of managers and sectors. From a geographical perspective, we allocate mainly to the US and Europe, even if some Apac markets like Japan could represent an opportunity, considering the recent resolutions about M&A activity and CPI.
From a global perspective, we prefer to invest in sectors that can benefit from secular macro trends, such as living, hospitality and logistics. We see the office market as bifurcated, with a differential performance by asset quality and ESG credentials.
While equity aligns well with value-added and opportunistic strategies, the consensus leans towards real estate debt due to factors like reduced availability, lower loan-to-value ratios, tighter underwriting standards, and intersecting reduced valuations, potentially leading to a debt refinancing gap. At the same returns, given equity levels, the risk decreases in debt investing. Values look stabilising in 2024, gradually bringing some convergence in price expectations, with an expected increase in investment volumes compared with 2023.
Marcus Phayre-Mudge, fund manager, TR Property Investment Trust
How do you anticipate central banks’ changes in interest rates to impact real estate investments?
The consensus is forecasting several cuts and a sharp reduction in policy rates by both the ECB and BoE – allowing for optimism that the “peak rate” is upon us. A crucial consideration for the near future is that when interest rates peak, property equities recover much faster than the wider stock market.
However, predicting interest rates is a challenge even central bankers struggle with; we can’t rest on our laurels until we have surpassed the peak.
As an additional safety net and to avoid relying solely on the chance of base rate cuts to drive returns, investors can look to sectors with market rental growth – such as logistics, multi-let industrial and retail warehousing. Additionally, hunt for businesses that have balance sheets which can withstand interest rates remaining at current levels. They are out there: lessons were learnt in the global financial crisis and excessive leverage is now mostly avoided in the listed sector, especially in the UK.
Jayne Backett, real estate partner, Fieldfisher in London
How are prop-tech, digital innovation and AI contributing to efficiency and growth?
2024 has the potential to see certain real estate sectors rapidly transform through AI and proptech. Powerful analytical capability is likely to give a competitive edge to some funds, for example, in forecasting based on trends and demographics. However, investments in newer technology could be restricted by ongoing negative economic pressures in 2024.
The granularity of data generated by AI offers investors the opportunity to spot unique patterns and consumer behaviours with greater accuracy. However, human interpretation and deployment of relevant strategies will remain critical.
There has been some controversy concerning the use of AI, specifically with possible in-built biases in models. Ever larger datasets are helping increase confidence, but they are not infallible. We anticipate an increase in the deployment of robotics, where the ability to automate functions and streamline operational costs will be attractive. Expect to see further evolution of digital technologies that assist with the detection of fraudulent activities to enhance the security of transactions and software that can collect data needed to inform ESG strategies.
Rebekah Mcmillan, associate portfolio manager, Neuberger Berman
With reference to Neuberger’s 2024 outlook, who are the “haves and have-nots” in real estate?
As the real estate market navigates the rise in rates, higher costs and structural changes, we’re seeing a growing bifurcation between the “haves” and “have-nots”. The “haves” include proven operators with resilient balance sheets in favoured sectors and regions where the supply-demand imbalance remains favourable, vacancy rates are low and there’s no shortage of financing. In the residential and industrial sectors, for example, deals are being transacted, albeit at a reduced volume, but not at significant discounts.
In our view, the “have nots” – those operating in more stressed sectors on the wrong side of structural trends, like office or certain retail such as regional malls – though they have underperformed, may yet to have been fully impaired as buyers and sellers continue to delay transactions in hope of better pricing.
Ultimately, we expect forthcoming adjustments in valuations to lead to further differentiation and create more of a stock picker’s market. Partnering with experienced operators and/or managers having strong balance sheets and proven expertise is an attractive way to seek and capitalise on opportunities in this environment. Additional ways to access attractive opportunities include the secondary market, whilst the performance of the disadvantaged, e.g. existing open-ended core funds may be more challenged.
Sandrine Lafon-Ceyral, chief responsible officer, Amundi Real Assets
How can greenwashing risk be managed in the real estate sector?
The risk of greenwashing claims in the real estate sector is becoming significant. As one of the biggest sectors in energy consumption and greenhouse gas emissions, the real estate industry has a fiduciary duty towards its investors. Transparency and formalised processes are critical to avoid greenwashing claims in real estate investing.
To that end, management companies must have clear, indisputable and publicly disclosed ESG processes and strategies. The assessment by third parties such as the SRI label and real estate independent benchmarks are essential tools that provide quality endorsements, allowing investors to assess the intrinsic quality of the tools and processes developed by the management company, helping to protect against the risk of greenwashing.
As a management company, being heavily engaged in the collective initiatives around green buildings is essential in ensuring that all real-estate sector players work collectively to define and achieve better sustainability commitments and indicators. This will encourage everyone to move in the same direction with aligned objectives.
