April 6th, 2021
CIO Private Wealth Management
CIO Asset Management
While the real estate sector is known by investors for its stability and predictability, it has not been immune to the various waves of the coronavirus outbreak. The pandemic has particularly challenged the fundamentals of commercial and office assets as a result of the growing trend towards work at home, but it has also accelerated several trends already visible in the old world. It has also strengthened the momentum in other segments, particularly residential, logistics, healthcare and alternative.
1. Offices: Avoid
The office segment entered the current crisis with positive trends, including rising rents in the main European countries. However, the uncertainty related to the development of home office is starting to seriously affect this segment as it leads to a decrease in demand for office space in the short/medium term. In the longer term, the good news is that tenants will be looking for new types of offices with more collaborative spaces, new services for employees, and more efficient building management (IT, security, energy efficiency). Additionally, we are seeing a growing polarization between well located assets in Central Business Districts and more peripheral offices which should be more impacted in terms of activity and valuation. Finally, the downward adjustment of rents should continue until 2022.
2. Retail market: Avoid
For several years, the sector has been facing structural difficulties linked to the emergence of e-commerce. The acceleration of this trend in response to the pandemic, combined with the successive lockdowns, put the traditional players in the sector in a difficult position. Despite apparent attractive valuations, there are still many unknowns regarding the rental business.
3. Residential: Maintain
The residential sector is barely affected by the current crisis and still offers growth opportunities, particularly in Germany. Similarly, property promoters, particularly in France, have shown good resilience thanks to sustained demand from institutional investors. The crisis does not question the theme of urbanization and supports the attractiveness of the asset class. Furthermore, we are seeing a new trend: the conversion of obsolete offices into residential space, made possible by the convergence of prices in the two segments and the densification of real estate.
4. Logistics: Buy
Logistics is the clear winner of the work from home situation, as the demand for warehouses is growing. This downturn has clearly highlighted the need for well-organized supply chain management, which is becoming increasingly important, particularly for urban logistics, benefiting from land scarcity. Also, consumers are likely to remain committed to e-commerce and its penetration in some European countries is still in its early stages.
What is the impact of rising bond yields on listed real estate?
As evidenced by the recent disappointing performance of listed real estate stocks, many market participants seem to view rising rates as bad news for real estate with a simple logic: rising rates imply higher real estate yields demanded by investors (higher risk premium) and lower asset values. Yet there are a few points to temper this statement:
Outlook - How to deal with your listed real estate equity portfolio?
The situation we are currently experiencing is not conducive to a positive performance of listed real estate. However, in the absence of an uncontrolled rise in long-term interest rates, we remain reasonably constructive for several reasons:
If it is too late to sell, it is still too early to reposition on the sector. What could be the triggers? A rate stabilization and a repricing of the physical real estate prices especially on the offices would be a good start. We are not there yet.
This document has been prepared by ODDO BHF for information purposes only. It does not create any obligations on the part of ODDO BHF. The opinions expressed in this document correspond to the market expectations of ODDO BHF at the time of publication. They may change according to market conditions and ODDO BHF cannot be held contractually responsible for them. Before investing in any asset class, it is strongly recommended that potential investors make detailed enquiries about the risks to which these asset classes are exposed, in particular the risk of capital loss.