© Chris Steele-Perkins / Magnum Photos – Guangzhou, China
Investors will need to be more adventurous in order to find the long-term assets that will produce the income streams that they and other investors require
Conventional asset classes in world real estate markets are fully valued. There are some enclaves where further capital growth may be expected, largely in Europe, but they are few and far between.
The name of the investing game is now income. The durability, growth prospects, quality and size of net operating streams will increasingly determine the value that investors put on real estate.
The fundamentals of occupier demand and their capability to generate rental and other income for property owners has come into focus and matters much more now in investment analysis than it did before the global financial crisis (GFC).
Changes in occupier demands and wants in real estate, the rise of new technologies, new companies and new sectors will change what is most lucrative in real estate markets.
Already, we are seeing alternative types of property become popular. These include co-working and flexible workspace, logistics and last-mile distribution warehouses, mixed-use buildings and high street premises, for example.
In some countries, sectors which were hitherto considered ‘alternative’ investments have become increasingly mainstream. Student housing, multi-family housing outside the USA, hotels and farmland have all become targets for core investors.
More institutions are willing to venture into value add, and even opportunistic, refurbishment, redevelopment, conversion and even development sites in order to secure the new types of assets they want at the scale they want them.
Yield compression has occurred not just over recent years but also between prime and secondary property, first tier and second tier cities, and core and alternative assets. The real estate investing universe is expanding rapidly.
Changing demographics and ageing populations are influencing many investors, with care homes, healthcare and retirement living featuring high on some of many opportunistic buy lists.
In 2017, our research teams, independently of each other and across the globe, seem to be agreeing that investors will need to be more adventurous in order to find the long-term assets that will produce the income streams that they and other investors require. A careful reading of the runes will be needed to distinguish between outdated and overvalued assets and those that will hold value and appreciate in the longer term.
There are still a few niches where yields can continue their downward trajectory and where capital values will continue to appreciate, but they are rare.
The search for value is taking investors everywhere further up the traditional risk curve and into activities they may not have considered ten years ago. It may well be that this diversification will prove to be one of the best ways of de-risking portfolios in future years as conventional asset classes with few growth prospects in the digital age start to underperform.