Research

Even though the importance of the Social component of ESG has already increased over the past few years, we think the negative consequences of the COVID-19 pandemic, in terms of economic and social disruption, will further accelerate this trend.

Socially responsible real estate strategies are very diverse and continue to expand. We think the importance of providing support services and infrastructure to communities and neighborhoods will grow dramatically (affordable housing, mental health assistance, schools/education, parks and safety).

  The growing inclusion of social responsibility factors into the real estate industry has triggered increasing demand to quantify and measure the positive contribution of real estate investments to society, specifically how they contribute to the 17 United Nations Sustainable Development Goals, which include:  

1. Good Health and Well-being
2. Quality Education
3. Decent Work and Economic Growth
4. Reduced Inequalities
5. Sustainable Cities and Communities
6. Climate Action
7. Partnerships for the Goals

Since global real estate is playing an ancillary role in investors' portfolios we think it is useful to analyze how traditional assets, such as equities and bonds, have behaved recently. So far, the pandemic has been a unique recession in terms of its impact on financial investments.

Indeed, major stock market indices will likely close 2020 with minor losses or even positive gains over the year, while bond yields have seen further downward compression from unprecedented lows. Assuming that the main central banks will continue to sustain their real economies with low rates for a relatively long period, we think that real estate will continue to be seen as a partial substitute for low risk bonds.

Pension funds and insurance companies, in particular, have appreciated the ability of real estate to match their outflows against the income stability provided by rent collection. It's no surprise that such investors are now focusing even more on properties which can assure a high level of income stability in a recessionary environment.

Property is considered a capital asset and Capital Gains Tax is levied on the gains arising from the sale of property. Such gains are calculated after adjusting the inflation rate, transfer and renovation charges.

With prime yields now below 4% in many key markets, the logistics sector has certainly seen a very rapid increase in pricing globally. Whether it is overpriced is hard to ascertain.

On the one hand, the exponential surge in pricing has been a reaction to extreme times. The pandemic has pushed e commerce penetration to levels many forecast would not be reached until 2025, or even 2030 in some countries. This has led to a surge in occupier demand, reduced availability and sustained rental growth. Low yields need not be remarkable if they reflect structural shifts.

There is a risk that yields will start to reverse should conditions in other sectors start to normalize, leaving those who bought at record low yields vulnerable to capital declines. However, currently it is hard to see anything that would trigger such a reversal.

Investors own REIT securities directly or through mutual funds or exchange-traded funds.The majority of U.S. REITs trade on either the New York Stock Exchange (NYSE) or the NASDAQ.

Investors may invest in a publicly traded REIT by purchasing shares through a FINRA-registered broker.

As with other publicly traded securities, investors may purchase REIT common stock, preferred stock or debt securities.

• Projects approvals can be verified from the corporation or the sanctioning authority's office
• Ownership documents can be confirmed from the Sub Registrar's office where they are registered
• Share certificate related to societies can be verified from the concerned Society itself

By convention, emerging sectors in real estate have struggled to find a permanent place alongside the traditional segments. Many investors have viewed them as niche and probably too high up the risk curve.

Liquidity premiums were also arguably higher for non-mainstream sectors, where the path to a clear exit was often not straightforward. That said, in recent times these emerging sectors have garnered a growing group of admirers. Moreover, these new fans are increasingly open to deploying capital into these new asset classes, which often are compensatory in returns.

Importantly, new sectors such as medical offices and data centers, to name but two, are backed by structural changes and macro-trends which are evolving at a pace faster than we ever knew. In the next year, we expect that the ample dry powder in capital will continue to find its way into these asset classes, mainly by way of operator and developer funding or portfolio acquisitions.

With a greater critical mass, risk perceptions and investment underwriting will improve as investors gain a deeper understanding of the fundamentals and operating nuances in these emerging sectors. Slowly but surely, emerging asset classes can become mainstream once risk factors become easier to price in.

The pandemic interrupted public discussion on environmental issues in 2020. However, insurance companies are concerned about the physical risks to real estate due to climate change, the effects of which are evident in the world today: warmer average temperatures, rising sea levels, melting ice caps, longer and more frequent heat waves, erratic rainfall patterns and more weather extremes.

According to Swiss Re1 , less than 50% of the total economic losses due to natural events in 2019 were insured. However, insurance companies, and in particular reinsurance companies, are increasing their attention on the effects of climate change, and real estate is a major focus. Currently the industry believes that the risk can still be insured, but has started to categorize areas with regard to risk exposure.

Most of the risk categorization is still relatively static and around natural catastrophes like flooding. However, the short-term nature of most property reinsurance businesses allows for continuous adjustment of risk views. As such, insurance companies are developing more dynamic models which incorporate different climate change risk scenarios that can continually embed new understandings into risk assessments.

This is likely to have an impact on insurance premiums for real estate assets over time. Ultimately, the question in 10 years might be what impact climate change has on an asset's valuation.

Yes, we think retail is still a major sector in the private market, but it’s clear why investors would wonder. Momentum has been negative for years. Even after recent value declines, retail comprises 19% of the NCREIF US Property Index as of 3Q20 and 23% of the MSCI Global Property Index as of end-2019. The retail allocation of large, diversified core funds is a bit lower, at just 14% of portfolios in the US2 .

Tenant credit risk, repositioning costs or just insufficient risk premiums will likely keep the sector out of favor in 2021. Looking to the future, retail fundamentals should stabilize when economic expansion strengthens.

Consumer spending powers the world’s largest economies. All shopping will not move online, and indeed the majority still remains offline. Retail sites occupy desirable locations across metro regions and development approvals will likely bring new life to old centers over time via mixed uses. We think that retail will continue to play a part in portfolio construction, though the rise of niche sectors means retail is not likely to regain all of the ground it has lost.

Notably, retail comprises only 9%3 of the US listed market, having dropped five percentage points in 2020 alone. By contrast, niche sectors account for more than half of the US listed market capitalization. On that point, office is just 6% of the US publicly-traded market, yet no one questions whether that sector is too small to be a Big 4.

Lending to commercial real estate has been constrained throughout this cycle, due to increased regulation after the financial crisis, as well as heightened risk aversion among bank lenders. This had created space for debt funds to enter the markets, where bank lending fell away most dramatically, particularly the UK, US and Australia.

The lower interest rate environment enabled them to secure deals at good risk adjusted returns and there has been increasing investor interest for debt products as returns on equity have compressed. Following the onset of COVID-19, initially there was a freeze in the market as lenders struggled to underwrite deals.

While rates are low, there are concerns about what widespread capital declines mean for loan-to-value (LTV) covenants, particularly in the embattled retail sector and increasingly in the office sector as valuations remain uncertain. For these two sectors, lending margins have increased slightly (~25 bps), while LTVs are believed to have fallen by around 5-10 percentage points.

Logistics on the other hand has seen margins fall as lenders engage in a flight-to-quality. There may be even more favorable returns for those willing to lend due to decreased supply. However, participants need to be very thorough in their due diligence to ensure valuations provide enough of a cushion.