Fallout from the COVID-19 pandemic continues to be a source of uncertainty for the Real Estate sector, but mass vaccinations and relaxed restrictions on public gatherings have reduced investor pessimism.
With the global economy experiencing its fastest year of economic growth in 2021 (5.9%) since the IMF began calculating global GDP, it was a year in which both property and infrastructure delivered strong returns for investors.
Infrastructure and real-estate projects have provided an outstanding performance in 2021; looking ahead into 2023, macroeconomic conditions are likely to be supportive of further healthy return performance. For both asset classes, GDP growth and inflation are key drivers of returns, and with the IMF expecting 4.9% global GDP growth this year and 3.8% inflation these two key variables are likely to remain a tailwind for both asset classes.
The rise in inflation is likely to be particularly beneficial for infrastructure assets at the lower end of the risk-return spectrum, given that for many of these assets the link between returns and inflation is tighter than for those higher up the risk spectrum. Digital infrastructure has grown in popularity in recent years, and COVID-19 has both brought forward demand levels in this sector by a number of years and reinforced to investors just how critical these assets are to our daily lives.
In a generally still low interest rate environment, combined with renewed demand for office and retail space, investors’ search for yield and moderate valuations could be a strong tailwind for the sector.
Points of interest within the sector:
- Industrial: Companies are demonstrating a near-insatiable appetite for warehouse and logistics properties to accommodate the surge in e-commerce.
- Storage: Pandemic-fueled lifestyle changes support the need for storage space.
- Communication towers: With more people working from home, plus telecom providers rolling out 5G wireless service, these service providers have a key function.
- Data centers: Businesses rely heavily on vital infrastructure for e-commerce, increased data consumption, and virtual meetings.
Positives for the sector:
- Low interest rates are positive for funding and make REIT dividends more attractive to investors.
- Warehouses, data center providers, and telecom towers are benefiting from technology trends.
- Single-family residential REITs are seeing strong demand and rising rents.
- Valuations are still relatively attractive.
- Long-term demographics support the recovery of extended-care and assisted-living facilities.
Negatives for the sector:
- High unemployment can lead to multi-family lease defaults.
- A sharp upward turn in the rates of home ownership and de-urbanization is a negative for multi-family housing.
- Short-term uncertainty about workers returning to the office exists.
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The sharp slowdown in the global economy hit the sector particularly hard, with the exception of valuations, which have merely shifted. While valuations are attractive, it may take time to assess the long-term impact of the pandemic. Even so, there are sub-segments that are less exposed to the sharp downturn. In fact, we have two distinctive eco-spheres: the digital world and the tangible physical world. The difference is important – it results in one global economy built on the back of bytes and another composed of bricks and mortar. As the economy changes, data centers (cloud capacities) are required. This shift has significant ramifications for the global economy across all industry segments. Some real estate companies will experience higher growth rates than others. Names to look at: Sergo, Goodman Group, GLP, Nippon Prologis, A-Reit, Mapletree Logistics, Equinix. |