Opportunities in global value-add real estate

Global Value-Add Real Estate

Why

Defining real estate strategies is more complex than the simple fund level definition we have accepted for many years. Driving value added performance is actually about ‘adding value’ and not simply a function of debt levels.
In some regions sustainability legislation is accelerating depreciation rates within the investible universe, creating opportunities to reposition high quality stabilized core stock.
Against this backdrop we see capital commitments to real estate continuing to grow, exemplifying the critical role of value added activities in contributing to the highly sought after stabilized investable stock.

When

Effective value-add investing requires an appreciation of real estate cycles with the timing of market entry and exit critical in driving performance. The lag between demand growth and a supply response is a major cause of volatility in real estate cycles. The real estate cycle is driven by several macro factors including: macro-economic landscape, interest rates, credit, demographics, and income. The underlying principle being that: when the economy is prosperous, individuals and institutions have more capital to invest in real estate. And when the occupational market is buoyant, there is a greater demand for space, business expansion and greater security of income.

Structural drivers, such as the net-zero transition, demographics and uptake of remote working are global trends, albeit impacting local markets differently. An example of this is rising e-commerce penetration. The unsynchronised nature of regional cycles implies that value added opportunities will always exist.

Where

Europe is considered the front runner in terms of investor appetite for well performing sustainable stock. This is due to the high levels of regulation that are continuously being implemented across the continent. In turn the green premium has become more pronounced. A lucrative strategy is targeting properties that may be underperforming in terms of adherence to regulation and refurbishing them into suitable core stock. Holding stock with strong sustainability credentials allows investors to take advantage of the emerging green premium.

Uncertainty in the US benefits tactical value add investing. The strong rebound in 2021 favored taking bets on major trends. Core real estate returned over 25% during the year², boosted by cap rate compression as investors took advantage of the recovery. Rising interest rates will likely cause a mean-reversion in returns, causing the market to favor quality cash flows. At the same time, it opens the door for selective market dislocation. This implies while long-term trends are still important, investors should focus on tactical opportunities in the near term for outperformance.

There are convincing reasons to diversify into the APAC region, particularly for investors who are underweight to APAC real estate markets in their global portfolios. Indeed, individual markets within the APAC region are often moving to different cyclical beats, providing good scope to realize potential diversification benefits from judicious exposures to divergent market trends. Moreover, stronger and more persistent growth fundamentals in the APAC region is increasingly warranting a continually rising allocation of capital and potentially slightly higher return expectations.