The year 2020 will be most likely remembered as a tipping point in many ways. The world has experienced a synchronised shock and will come out of it traumatised, but also wiser, stronger and more prepared.

During times of uncertainty, property has always been seen as a safe haven. Despite the complexity of the economic and political landscape and the short-medium and long-term implications of the pandemic, which are yet to be identified, there is still value to be found in the markets.

Interest rates are at record lows, and have been for a long time. That already makes real estate attractive.

Property’s long-term appeal

Then there’s property’s long-term appeal. Developed countries face increasing levels of retired people, and real estate offers a good annuity match.

Of course, economic, political and cyclical risks always exist. So, what is interesting to look at is how investors are working around these through pricing and diversification. An investor’s domestic outlook is often a driver. Asian institutional investors, for example, such as sovereign wealth funds, pension funds and insurance companies, need to diversify globally, as their rising allocations to real estate cannot be absorbed locally.

On the ground, different strategies help investors find the risk/return values they need from the market. Core investors value transparency and liquidity, with demand and supply fundamentals of paramount importance to reduce risk.

In 2020, ‘flight to quality’ will prevail. This means that prime offices and logistics in key global markets, such as New York, Paris, Los Angeles, German cities, Tokyo and Sydney will remain in demand.

In 2019, New York, Los Angeles, San Francisco, Paris and London were the most active markets, according to Real Capital Analytics. Domestic investors, who know their local markets well, might also consider prime opportunities in secondary cities, especially with good quality tenants and long lease terms in place.

Highest year-on-year activity

However, core investors also seek resilient, innovative cities that attract talent and will be more defensive to long-term risks. These include mature cities such as New York, Tokyo, London, Singapore and Los Angeles, smaller cities, such as Stockholm and Barcelona, and also developing ones such as Shanghai, Beijing and Shenzhen. In 2019, Seattle, Beijing and Munich showed the highest year-on-year increase in activity at 59%, 56% and 54% respectively.

Other investors feel comfortable riding the economic cycles with value-add strategies. These include developing and emerging markets with better rental growth prospects – logistics, in particular – in the Netherlands, Central and Eastern Europe or Vietnam. According to MSCI, the average net operating income yield for industrial property globally in 2019 was 4.6% compared to 4.1% for offices. 

Some investors favour structural opportunities: retirement homes for ageing populations, multifamily in cities with high urbanisation rates. Underscoring this is a more operational approach with active asset management to create value through redevelopment and refurbishment in this low-growth environment.

Tactical buying of retail

Finally, there is a role for opportunistic strategies to capitalise on structural disruption, such as we see in retail. As the sector reconfigures to accommodate an omnichannel approach and additional uses, tactical buying of retail in markets such as the UK and the USA will give investors potential for higher returns. There will be good schemes where rents have already rebased, or where buying cheap provides the flexibility to rebase them.

Looking ahead, there will also be opportunities for re-purposing by adding new uses and creating relevant and attractive mixed-use environments.

In the long term, investors may be challenged by changing occupational requirements towards flexibility, which will lead to shorter leases, just as the world’s pension funds need more long income. To mitigate this, investors need to become operational.

There are also pending regulatory risks, especially in multifamily, where rent controls are being phased in to protect tenants in cities such as Berlin and New York. This could lead to limited prospects for high rental growth.

Assessing climate change

One of the greatest changes in investment will be what’s required to tackle climate risks. Meeting carbon-neutral targets and regulatory interventions could negatively affect capital expenditure and operating income for investors. Extreme climate conditions could also affect long-term asset value.

At a broader level, the environmental, social and governance (ESG) movement, driven by younger generations, is now essential in corporate and institutional investment strategies, health and safety and sustainability do offer a downside protection and should lead to improved risk-adjusted returns as it considers long-term risks.

There is a debate about the shape of the economic recovery in 2021 and beyond. However, with low interest rates, real estate will remain attractive. A mismatch between the availability of ‘dry powder’ and the supply of good quality stock will keep competition high and yields low. During this phase of uncertainty, rental growth prospects are also limited and some sectors will suffer as long as the downturn lasts, while others will recover faster.

Investors will need to continue to adapt to uncertainty and risk. Careful asset selection, diversification and the right pricing of long-term risk will characterise those which are successful.

With opportunities emerging from structural changes, it is about meeting the need for new products and repricing those that are not fit for purpose. The route to high returns in this part of the market is repositioning, redevelopment and active asset management.

Most active metro areas (volume of investment in 2019)

Note: Hover over each metro area for detail.  Source: Savills using RCA