Commercial Matters: Real Estate Investment for the Future
It’s a volatile time for investors in capital markets as they ponder how best to channel their wealth. Where are the world’s most innovative cities and the massed pools of sustainable real estate? For cross border investment, which markets are most resilient and what are the forecasts for capital flows in 2021? At a time when working from home is the new normal, what are the implications for the office sector and how will Brexit impact that? What should investors target and how does real estate investment sit alongside other asset classes?
These are some of the questions addressed in Active Capital 2020, Knight Frank’s latest research report that employs deep datasets and purpose-built modelling processes to provide answers for investors.
“We are in unprecedented and uncertain times which make decisions on where to invest capital ever more complex,” comments Andrew Sim, Knight Frank’s Head of Global Capital Markets. “Simply waiting for the skies to clear is not the solution. Well-informed and logical action is required and that requires accurate data and robust model-led thinking.”
“Investors should be reassured that global markets are very much alive,” says Mr Sim: “Hospitality sectors and retail are both adversely affected but otherwise activity is strong. Residential investment for example is in full resurgence globally. We are continuing to inspect buildings and carry out transactions.”
Active Capital makes a strong case for investment in commercial real estate, offering an income and stability that other asset classes cannot match. At a time when more than 60% of bond yields globally are below 1% and over $16 trillion have negative yields, real estate investment’s potential to generate income should keep it in favour.
The watchwords for investors at this time of global instability are resilience and sustainability. Resilience in real estate entails assets able to sustain tenant demand and support rents, underpinning capital values and ultimately returns for investors. They are best-placed to weather shocks and benefit from the recovery and wider structural changes.
Active Capital provides a framework to uncover resilient real estate, in geographical, asset and market terms. It considers innovative cities which will attract and retain people and their money, it discusses the sustainability of buildings, how resilient they are to climate change legislation amendments and it examines the ability of assets to attract finance, especially important when lenders are becoming more discerning.
The cities highlighted in Active Capital are ones where innovation – defined as combining labour and capital in new ways to drive growth – is strong, whether because of academic research, targeted funding into biomedical research or grassroots motivation to innovate. The field is led by London, the overwhelming star performer. However it is not just major cities such as Paris, New York or Tokyo which are well placed to innovate, smaller cities also score highly for innovation. Oxford and Cambridge sit at either end of the ‘Brain Belt’, benefitting from £5.5 billion of infrastructure investment and together with London form a ‘Golden Triangle’ that demonstrates how a robust research-led university sector helps build market resilience.
The global increase in sustainable buildings – there are now over 120,000 green-rated buildings worldwide – is another reassuring sign for those targeting resilient returns. Governments are actively targeting carbon reduction and future regulatory and tax changes should favour green investment. Sustainable buildings will also drive greater tenant retention and therefore income resilience and for brands, a focus on sustainability through its buildings is a visible way to demonstrate their commitment to this deeply held and fast-growing cause.
“The office sector globally has always been the biggest sector in volume terms,” highlights Mr Sim. “The increasing trend in remote working coupled with anticipated corporate distress has caused investors to stutter temporarily over planned investments within the office sector. Most corporates are yet to decide on future accommodation requirements and investors fear the extent of down-sizing. Given traditional allocations, reduced volumes in the office sector will present a challenge for investors. Should they extend their sector diversification investing in alternatives such as data centres or science parks or perhaps yet more logistics. These are all challenges for 2021.”
Government support worldwide makes it hard to identify significant distress in real estate investments at present but it would be foolish to think there was none waiting in the wings. Yet despite that and despite the unknown effect Brexit will have on supply chains and European office space, the fast-changing landscape means that Mr Sim feels cautious optimism in a way that was not possible even a month ago.
“Our forecasts of the likely flows of capital between countries in 2021 made interesting and heartening reading,” he concludes. “Liquid, global safe havens will continue to appeal and under current travel restrictions, investments in near-neighbours have an obvious appeal but we have also seen investment opportunities in a range of alternative sectors, data centres, student housing and industrials for example, something I believe COVID will accelerate.”
