Why does real estate offer investors a strong investment opportunity in the current environment?
- Rising interest rates attributable to both higher inflation expectations and higher economic growth expectations, both positively impact real estate cash flow streams and then real estate valuations, which is the value of investing in a real asset. Historically real estate net operating income follows GDP growth with a one year lag, so this would be a very positive indication for the sector this year.
- Real estate can offer capital appreciation and income opportunities when inflation rises. And many long-term leases have built-in rent escalators that protect real income generation. Higher wages can lead to more spending, which is a plus for single-family and multi-family residential housing. Further, from the perspective of owning and managing real estate properties, there is a clear benefit: control. As such, direct real estate managers have the flexibility to improve operations and focus on new technologies to manage costs. They can also use their properties creatively to generate revenue and offset higher wages, perhaps converting underutilized spaces like basements into amenity spaces, storage facilities or data centers.
What is the geographical and sector allocations of your real estate strategy, and how does it specifically gain exposure to real estate?
Global cities real estate continues to offer attractive income returns compared to the respective bond markets. All U.S. markets and the majority in Asia and Europe offer relatively better value compared to bonds than over the last 10 years on average. Our strategy will continue to focus on overweighing housing, industrial, and healthcare:
- Housing: The single family housing sector is an attractive investment primarily due to changing demographics and consumer behaviour, including a growing millennial renter pool, an increasing propensity to rent couple with a lack of capital to buy and limited apartment inventory.
- Industrial: Positive outlook fuelled by strong e-commerce demand and supply that remains in check. The pandemic accelerated existing trends, particularly the adoption of e-commerce, which continues to be a major driver for warehouse leasing
- Healthcare: This sector has been a steady performer through the crisis and are not subject to work from home risks given the need for in-person interaction and specialized equipment for the tenants. COVID-19 is likely to spark more research into finding vaccines for future pandemics, which will be a key driver of life science demand.
What are the expected returns and what are the biggest risks for the strategy?
Real estate can offer capital appreciation and income opportunities when inflation rises. And many long-term leases have built-in rent escalators that protect real income generation. Higher wages can lead to more spending, which is a plus for single-family and multi-family residential housing. Further, from the perspective of owning and managing real estate properties, there is a clear benefit: control. As such, direct real estate managers have the flexibility to improve operations and focus on new technologies to manage costs. They can also use their properties creatively to generate revenue and offset higher wages, perhaps converting underutilized spaces like basements into amenity spaces, storage facilities or data centers. However, we are being cautious with the retail and office sectors.
- Retail: The retail market continues to suffer, but we see the most strength in the grocery and convenience subsectors and will take advantage of mispriced opportunities within these subsectors
- Office: There will be long-term effects surrounding the more flexible office and work-from home arrangements, but the depth is still unknown.
The Fund Selector Asia Investment Forum Hong Kong was held virtually on 8 March 2022 and was sponsored by HSBC Asset Management, Jupiter Asset management, Nuveen and Vontobel Asset Management.
Find out more about what was discussed and the strategies that were presented here: https://fundselectorasia.com/events/fsa-investment-hong-kong/
