The outlook for global real estate

Global real estate wasn’t immune to last year’s widespread economic problems – but how is the sector looking now that 2023 is fully underway?

The painful combination of slowing economies and rising inflation from supply chain problems and the war in Ukraine has been making life very challenging. But while there is still an understandable degree of caution given the uncertainties, those following the industry remain relatively optimistic.

Here, we take a look at the views of industry observers and highlight some property-focused funds that could be worth considering.

Changing market dynamics

Businesses are facing a variety of headwinds that are impacting growth, costs, supply chains, and forward planning, according to JLL, the global commercial real estate services company.

Its report, ‘Global Corporate Real Estate Trends in 2023’, suggests organisations will need to focus on strategies and solutions that enable them to adapt to “rapidly changing” market dynamics. “Understandably, businesses will be more cautious and may consider reviewing their CRE [corporate real estate] strategy in light of the current operating environment,” it stated.

The global real estate world also faces “transformational shifts” in how buildings will be used, valued and transacted this year, according to a report from Deloitte, the professional services firm. Its ‘2023 Commercial Real Estate Outlook’ reveals that a third of chief financial officers in the industry anticipate cuts to expenses, with sustained high inflation as a particular risk.

According to Philip Law, Deloitte’s China Real Estate Industry Leader, uneven growth trajectories could propel the industry in new directions over the next few years. “Amid high uncertainty, commercial real estate companies should focus on strategic, asset-level decision-making to meet the evolving needs of investors, tenants, and regulators,” he said.

ESG is a significant trend

One of the biggest changes being seen is the emerging importance of ESG (environmental, social, governance) factors, according to PwC, another professional services firm. Its survey,  ‘Emerging Trends in Real Estate: Europe 2023’, found the entire sector – from construction to operations – were making it a part of business decisions. “This includes everything from reducing emissions to diversity and inclusion within the organisations,” it stated. The survey concluded that 87% of respondents saw the importance of creating social impact alongside financial return.

Funds to consider

So, where does that leave investors? Here we take a look at three funds that provide access to different parts of the global real estate market to see what managers are expecting.

Cohen & Steers Global Real Estate Securities

Industry specialist Cohen & Steers is optimistic about the sector’s prospects, despite the difficult economic backdrop in many regions. According to a recent update for the fund, which is one of its flagship portfolios, it offers “attractive return potential” relative to broad equities.

While noting how slowing economic growth and high inflation temper the near-term outlook, it pointed out that cash flows generally remained sound, with healthy earnings growth anticipated. “Real estate companies typically have high operating margins, low sensitivity to commodity and labour prices, and (in many cases) inflation-linked rents, making them better suited than traditional asset categories to defend against a prolonged environment of high inflation,” it stated.

The fund, which is nominally managed by Jon Cheigh, the firm’s chief investment officer, makes decisions based on a combination of company analysis and its views on the wider economy. Alongside Rogier Quirijns, Jon Cheigh also looks after Cohen & Steers European Real Estate Securities, which provides access to European commercial properties.

CT European Real Estate Securities

This fund, which is managed by Marcus Phayre-Mudge and Alban Lhonneur, offers investors exposure to real estate securities listed in the UK and Europe. It mainly invests in the shares of European listed property companies and businesses related to the real estate sector. However, derivatives can be used for both long and short market exposure.

The managers combine macroeconomic analysis of the wider market with individual stock selection. Each company is assessed on factors such as the quality of its management team and assets.

In a recent update, the managers noted how investor sentiment had changed tack, with a renewed belief that the end of the rate tightening cycle will come later this year. “Whether this is overly optimistic or not will primarily depend on the stubbornness of wage inflation,” they wrote. “Energy price falls are adding to the optimism, as is the increased military support for Ukraine.” The main positive contributors to the fund’s performance this year have been London offices, UK majors, French offices, and European healthcare. UK retail, meanwhile, has been a negative.

TIME: Commercial Long Income

The aim of this fund is to provide a consistent income stream, along with some capital growth prospects, from acquiring property with long leases. The experienced management team at the helm, Nigel Ashfield and Roger Skeldon, look to achieve their objectives by finding long, high quality tenancies. The portfolio is made up of properties from around the UK, with around 94% of rent reviews being linked to inflation or having a fixed uplift.

In a recent commentary, the managers pointed out that market volatility remained as a result of the war in Ukraine, the fallout from Covid-19, and the high inflation.

However, they insisted that the long-term fundamentals of the fund were still strong, with the buildings and tenants unchanged and 100% occupancy levels being maintained.

“The fund continues to focus on investing in sectors with supportive long-term dynamics and avoids more volatile sectors such as high street retail and shopping centres, which are going through structural change,” they wrote.

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