The 10 Key Questions For Real Estate In 2021
After several years of predictability, 2020 was one of the most turbulent years in recent real estate history, and 2021 is likely to be just as uncertain.
Coronavirus vaccines, social impact, climate change and what makes a mainstream real estate sector will be on investors’ minds in the new year, according to UBS Asset Management. Here are the investment bank’s top 10 real estate questions for 2021.
What are the different COVID-19 scenarios?
This is the central question for much of humanity, not just real estate. UBS’s rationale is: “The vaccine will be effective, widely available in 2021 and allow the economy to gradually recover to sustainable growth.” This will support demand from property users and investor confidence.
If the vaccine is introduced sooner than expected, then leisure and hotels will see the greatest benefit. If it’s slower than expected, 2021 will be “lackluster,” the polite term UBS uses. If the virus mutates and proves resistant to the vaccine, “it could prolong the pandemic and ultimately force society to adapt permanently to the virus, radically changing the way we live.” It’s best not to think about it too much.
What role do real estate play in customer portfolios after COVID-19?
The pandemic has shown that the income component of real estate can be risky. In a world where central bank incentives keep stock prices high and bond yields low, prime real estate, where returns are very secure, will continue to be highly desirable to institutional investors who must pay off liabilities, and capital will continue to be the most desirable Continue to track the sector and liquidity will remain high, said UBS.
Will COVID-19 reverse the megatrend of urbanization?
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Spoiler alert: no. As long as vaccines are effective and the world goes back to normal, jobs will remain in cities, which means people will want to keep living in them. UBS predicts fewer people will come to the office, but remote work is unlikely to break up, especially with younger workers who need to be in the office to learn and build relationships.
What will the occupancy of the company headquarters look like at the end of 2021 and what does the future of this sector look like?
Even so, we will use fewer offices in the future, said UBS. The desire to work remotely, at least temporarily, remains, and companies are planning to reduce their office space, adding gray areas to the market. Offices need to improve their social interaction space to attract people.
Will the social component of the ESG gain importance after the disruption of COVID-19?
The coronavirus pandemic has exposed some major gaps in the social infrastructure of countries like the US and the UK, particularly in terms of the quality of living for poor, elderly and vulnerable people. Real estate can fill some of these gaps, according to UBS, and the pandemic will catalyze the already evident interest in investing in social impact. The same goes for real estate companies that are taking the necessary steps towards diversity and inclusion.
Are logistics properties overpriced?
Logistics was already in jeopardy before 2020, but the pandemic has boosted user and investor demand for the sector. Returns in many markets are now below 4%. So is that too expensive? On the one hand, short-term increases in demand are part of a broader structural shift in favor of the sector, which should help ensure that demand continues, said UBS. On the other hand, the bidding on some deals is noisy, “which, according to UBS, calls into question the robustness of part of the underwriting”. According to the bank, the sector will remain robust in the foreseeable future.
Is Retail Still a Big 4 Sector?
Westfield shopping center in Stratford, London, received around 50% of normal visitor numbers when it reopened after the UK lockdown.
Yes, but it’s shrinking. Even after recent falls in value, the private customer base comprised 19% of the NCREIF US Property Index as of the 19th quarter of 2020 and 23% of the MSCI Global Property Index as of the end of 2019. The private customer allocation of large, diversified core funds is somewhat lower. With only 14% of portfolios in the U.S., it’s likely to continue to decline as a percentage of portfolios in the short term, but as retail space converts to new mixed-use systems, it will continue to have a place in institutional portfolios, UBS said. However, it is unlikely to ever regain importance at the beginning of the century.
What is the likely growth path for emerging sectors such as medical offices and data centers?
Real estate asset classes like medical offices and data centers have outperformed traditional areas this year, but are niches ever going mainstream? UBS has not yet fully argued, but investors are more comfortable with the operational aspects of these sectors. The more people invest in them, the better they can assess the risk of niche sectors and the more popular they become.
What impact could climate change have on property insurance costs?
Not so much today, but much more in the future. According to UBS, reinsurance companies in particular are paying much more attention to the potential impacts of climate change and are building dynamic models to take this into account when pricing their home insurance. In a decade, climate change is likely to affect the value of a real estate asset, UBS said.
The prices are low, but the risk is not. What is the current state of the credit markets?
“After the onset of COVID-19, the market initially froze as lenders struggled to close deals,” UBS said. The money to be made by the spread between low interest rates and high credit margins was offset by concerns about the direction of values, especially in the office and retail sectors. In these two sectors, margins have increased by about 25 basis points, while loan-to-value ratios have decreased by about 5% to 10%. However, interest in logistics has increased. UBS said there is money to be made to lend good, high margin assets, but care must be taken not to support the wrong horse.