Investment Themes - 2017
In late 2016, the U.S. Fed’s first interest rate hike in over a decade had many questioning whether “the Big Switch” was on – would investors begin switching from yield stocks such as real estate and infrastructure to inflation-linked equities in a rising interest rate environment? However, by early 2017, with the incoming Trump administration in the U.S. setting a combative policy agenda and ongoing worries in Europe around Brexit, significant macroeconomic uncertainty is clouding the inflation outlook. In this environment, real estate is likely to remain attractive for many as a defensive investment and we see current asset allocations holding.
Core European countries have an ageing demographic profile which has been intensifying over recent years (Germany, Belgium, Austria, Luxembourg and the Netherlands all have 17.5%+ of the population over 65 years old). As a result, a growing number of investors are looking to healthcare assets in their portfolios as they seek to add an asset class with strong underlying demand, low volatility and attractive risk adjusted returns. However, investment in European healthcare remains fragmented in comparison to the highly-securitised markets in North America and the Asia Pacific, providing a challenge for investors in accessing quality product.
Along with Trump’s proposed infrastructure investment program in the US, significant investment is expected in the UK, Europe, Asia and Australia as governments look to fiscal rather than monetary policy to stimulate their economies. Given that many of these governments are operating with significant budget constraints, there will be numerous opportunities for PPPs and other innovative delivery mechanisms. The question for real estate organisations is how can they capitalise on this infrastructure boom through associated real estate opportunities?
The growing influence of property tech will be felt throughout the bricks and mortar industry, with new technologies changing the way people use and interact with physical assets and new, agile businesses challenging old ways of selling, leasing and managing real estate assets. The rise of property tech presents both an opportunity and a challenge for real estate businesses – early adopters stand to gain from enhanced efficiency and better interaction with their customers, whereas those who fail to adapt risk being left behind.
Ongoing quantitative easing measures from the Bank of Japan have fuelled Japanese investors with relatively cost effective debt and an appetite for global yield-based investments. However with a stubbornly low-growth domestic economy and strong competition for prime Tokyo assets, many investors are looking to international real estate markets for opportunities. The re-emergence of Japan on global capital markets presents a significant opportunity for institutional real estate organisations and investment managers, however sellers need to be aware of the unique drivers and preferences of Japanese investors compared to other sources of institutional Asian capital.
With OPEC deciding to trim production to support oil prices, most analysts are forecasting prices of US$50-$60 per barrel in 2017, with a natural ceiling in place due to shale production break even entry points. This should be sufficient to stabilise national budgets of oil-reliant GCC countries, providing greater certainty and re-activating economic growth, which in turn will allow for a stabilisation of real estate markets as confidence returns.
Due to the increased competition for prime commercial assets, “build-to-rent” residential is beginning to look attractive as a new asset class in the UK, Australia and the UAE. Mature markets such as the US, Japan and mainland Europe show that it is attractive for institutional investors, with a stable income profile and attractive risk-adjusted returns – however development economics remain challenging in Australia and the UK due to the strong influence of strata buyers in both markets. Changes appear imminent in the UK, with new policies aimed specifically at promoting institutional investment in rental housing, and Australian may not be far behind.