2019 ISA Mid-Year Update

The mid-year assessment of real estate investment markets contains insights and analysis from around the world.

Thus far in 2019, political headlines have dominated our investment committee discussions and research reports. Yet national economies, capital markets and property markets all continue to be relatively impervious to the geo-political noise. It’s as though businesses, consumers and investors are all wearing sound-canceling headphones.

As the second quarter closes, momentum has shifted downward. The triggers for “Slowbalisation” include aging societies, the rise of nationalism, and trade disruption. Yet, as our monthly macro decks have shown, the capital markets generally remain strong. Stock market indices have bounced back after taking losses when the U.S.-China trade wars escalated on May 10th. Debt is cheap and plentiful. Credit spreads are not gapping out anywhere. While we identify several problematic industries and potential ripple effects from trade interruptions, the general momentum in property markets is positive.

Political and structural uncertainty has kept interest rates low on sovereign debt. One fifth of all government bonds produce zero or negative interest rates. German bonds have hit a record low, negative yield in June. Investors remain starved for yield and real estate is one place they can still expect to earn positive dividends. At this stage of the property pricing cycle, we know that there are real estate sectors, like weaker shopping centers or disconnected office buildings, that already are, or soon will be, in serious financial trouble. Yet, price discovery can take several years as owners avoid selling and memorializing any losses. In the meantime, banks will still lend money to owners who contemplate property makeovers, not all of which will be entirely successful.

As the year has unfolded, the space between real estate’s winners and losers is getting wider, as we predicted it would. Investors are putting record-high valuations on logistics properties all over the world, while investors shy away from retail properties and older offices that lack strong urban or suburban networks. The office sector has been propped up by co-working absorption and momentum in life sciences, healthcare and technology; but the costs of leasing to many tech tenants is high. The amenities they demand are expensive. Rental residential markets are generally faring well in many cities, but they are beset by new policy initiatives that may hurt their values in the future.

We maintain our recommendation for investors to pursue both “low beta” and “positive alpha” strategies. The core strategies will withstand volatility in other asset classes best. A “positive alpha” strategy, takes carefully calibrated risks and gets rewarded for doing so. As volatility rises and global growth begins to slow, income stability plays an important part in an investment portfolio. The second goal (positive Alpha) seeks specific assets and sectors within real estate capable of contributing to out-performance relative to the steady erosion of core property indices in many countries.

Two documents are included in this update: The Mid-Year ISA Update Report, and the July 2019 Mid-Year Macro Deck, which includes a summary of our much-requested report “The Investable Universe”.