The 10 Questions Real Estate Has To Answer In 2019

As you build your 2019 strategy, there are 10 key questions to keep in mind, a UBS Global Real Estate report this week outlined.

From the impact of rate rises to the rise of the shared economy to technology, here are the issues the industry will need to grapple with, and UBS’ thoughts on how things will play out.

Why should anyone invest in core real estate today?

Because unless you can predict the future (which you can’t) it is still the best way to get access to what boring, prime real estate provides best, UBS said: diversification, periodic income and relatively low price volatility.

“A core real estate strategy is a hedge against these extremes, allowing investors to collect current income regardless of the next pricing shock,” its report said.

What can we learn from the spread between real estate and bond rates?

In the U.S., rates have already begun to rise, but real estate yields have not been hit too dramatically because the improving economy has helped rental growth, UBS said. In Europe, where rate rises are expected in 2019, “the expectation of monetary policy changes could push bond rates upward and property yields will likely follow more slowly”.

How will political risk influence real estate investment decision-making?

Perceived political risk has been a dominant theme for the past few years, yet global property returns and liquidity levels have remained exceptionally strong, UBS said. Will 2019 see the same pattern repeated? Hmm, maybe not.

“The ongoing US-China trade dispute is likely to have some negative impact to global economic growth, which will have indirect knock-on effects on real estate,” it said.

“In Italy, the direction of the coalition government has spooked investors. Long term government bond yields are now above prime property yields, and we question whether a negative risk premium will be sustainable going forward.”

And, oh yes, Brexit.

Will the industrial bull run finally come to an end?

Industrial and logistics have been the star performers in terms of returns for the past few years, and UBS said while growth should continue for urban logistics, the sector as a whole should move from a “buy” to a “hold”.

“Over the past 15 years there has been a strong correlation between industrial yield compression and the share price appreciation of global logistics companies,” it said. “These prices have softened recently as the outlook for global trade has deteriorated.”

How will Asia's outbound investment influence global capital flows?

“We expect a normalisation of flows as cross border investors pay more attention to hedging costs amidst a rising rate environment,” UBS said.

The obvious example is China, where capital controls have stymied outbound investment, and any money coming out of China next year will be more targets at Hong Kong, it said. A wild card is the emergence of Japan's massive pension funds into cross-border real estate, it added.

Have niche property types become the new normal?

“We can almost guarantee that novel investment themes and sectors will be a mainstay in 2019 as yield-hungry investors look for relatively attractive returns,” UBS said, adding that sectors like student housing, data centres and senior living also had strong demographic trends in their favour.

The one thing to watch out for: “Not all alternatives are created equal and most require investors to commit to longer term investment horizons or to accept higher operational risk,” it said. “Investors should be appropriately compensated for these risks and that becomes less clear the more yields compress.”

Will the sharing economy be an important source of occupational demand yet again?

Very much yes, UBS said, particularly in the worlds of flexible offices and co-living, which it sees accelerating, and shared warehousing could also become a thing. There’s always a but, though.

“While offering opportunities, demand from those new actors also brings challenges for investors, such as more intensive property management and/or reduced transparency of underlying asset performance once operational activities are outsourced to a specialized service provider,” it said.

Is this the end of retail as we know it?

Obviously not, but it will be another step on the journey into something unrecognisable from what we know today.

“The blurring of boundaries between traditional real estate sectors will mean that what used to be logistics and leisure will now be part of retail,” it said. “In addition, parts of what was previously lower-quality retail will become office, residential, or something else entirely. The sector will remain an important, albeit reducing part of portfolios, but what we call retail may well be different in the years ahead.”

How will a weaker operating environment affect the spread of ESG best practice?

Given making money from real estate has ben relatively easy for the past seven or eight years, that has allowed environmental, social and governance concerns to rise up the agenda. As things get tougher, alas, those metrics could well take a back seat, UBS said.

But its optimistic view is that “any coming disruption will reinforce the conviction of the leaders in this field, while the late adopters will find it increasingly difficult to engage with capital sources who have made ESG a priority”.

How will technology influence real estate values?

In a nutshell, it will make real estate better to use, but not necessarily easier to make money from.

“We believe that underlying technological evolution will tend to push capital expenditure requirements higher,” it said. “Although there will be some offset in operational costs through tech solutions, investors will ultimately require slightly higher yields if they are to maintain their returns."