Opportunities in global value-add real estate

Opportunities in global value-add real estate

Extensive structural changes have created a unique opportunity for Global Value-Add Real Estate. As long-term investors, we focus on sectors supported by underlying structural themes, to guide you through the changing landscape we have identified three key themes that describe how market changes are creating near-term opportunities to invest.

Three key themes

01

Macro Economics

Macro-economics and geopolitics drive real estate cycles, and timing is an important driver of performance. It is therefore critical for investors to have an acute understanding of the economic cycle and the current state of the global, regional and country level geopolitical landscape.

02

Structural Shifts

The pandemic has accelerated structural changes such as flexible working, ESG, technology and consumer behaviour. Building conviction in the structural dislocations in the market will further enhance performance for a value add investor, and is the foundation of successful asset allocation.

03

Diversifying Risk

The scale and speed of the impact of structural and cyclical change can be very different across regions. Diversification of risk can be achieved by careful consideration of portfolio construction, targeting a range of sectors across North America, Europe and APAC.1

Today’s real estate environment is accelerating a new global opportunity for value add real estate investing.

To guide you through the changing landscape we have identified 3 themes that describe how market changes are creating near-term opportunities to invest in Value Add Real Estate

1. Macro Economics coupled with geopolitics will influence real estate cycles and timing of investment.

It’s critical for investors to have an understanding of the global, regional, country and local level geopolitical landscape.This informs investor timing of market entry and exit and helps identify market opportunities presented by the cycle, and the resilient sectors and assets.

2. Structural Shifts, conviction in what will drive future demand is the foundation of successful sector allocation.

Investors need to have a clear view of which sectors are likely to enjoy growth as a result of structural change, and avoid those in longer term decline.The pandemic has accelerated many structural trends, flexible working, ESG, technology, impacting the way we live, work, play, shop and study.Whilst we have tended to focus on the E of ESG, the S, the social impact of real estate is also becoming a critical lens through which we must think about real estate and the wider built environment.And for this reason we need to restate the way we have historically thought about about change and its impact on how we all interact with real estate.

3. Diversifying Risk. Unsynchronised regional cycles provide greater opportunities for regional diversification.

Risk diversification can be achieved by targeting sectors and regions that are at different stages of the economic cycle and experiencing a different pace and magnitude of structural change.A driver of change that may impact one region significantly, may not impact another at the same pace or to the same extent.Therefore careful portfolio construction targeting a range of sectors across North America, Europe and APAC can provide greater risk diversification than simply focusing in one region.

 

As you can see, these three thematics provide a framework for thinking the many diverse opportunities emerging across the Global Value Add Real Estate universe, and this is why we are so excited about Real Assets today,

 

For more detail, please read our full whitepaper, alternatively, If you have any questions or want to find out more, please reach out to the team we would be delighted to connect with you.

Today’s real estate environment is accelerating a new global opportunity for value add real estate investing.

To guide you through the changing landscape we have identified 3 themes that describe how market changes are creating near-term opportunities to invest in Value Add Real Estate

1. Macro Economics coupled with geopolitics will influence real estate cycles and timing of investment.

It’s critical for investors to have an understanding of the global, regional, country and local level geopolitical landscape.This informs investor timing of market entry and exit and helps identify market opportunities presented by the cycle, and the resilient sectors and assets.

2. Structural Shifts, conviction in what will drive future demand is the foundation of successful sector allocation.

Investors need to have a clear view of which sectors are likely to enjoy growth as a result of structural change, and avoid those in longer term decline.The pandemic has accelerated many structural trends, flexible working, ESG, technology, impacting the way we live, work, play, shop and study.Whilst we have tended to focus on the E of ESG, the S, the social impact of real estate is also becoming a critical lens through which we must think about real estate and the wider built environment.And for this reason we need to restate the way we have historically thought about about change and its impact on how we all interact with real estate.

3. Diversifying Risk. Unsynchronised regional cycles provide greater opportunities for regional diversification.

Risk diversification can be achieved by targeting sectors and regions that are at different stages of the economic cycle and experiencing a different pace and magnitude of structural change.A driver of change that may impact one region significantly, may not impact another at the same pace or to the same extent.Therefore careful portfolio construction targeting a range of sectors across North America, Europe and APAC can provide greater risk diversification than simply focusing in one region.

 

As you can see, these three thematics provide a framework for thinking the many diverse opportunities emerging across the Global Value Add Real Estate universe, and this is why we are so excited about Real Assets today,

 

For more detail, please read our full whitepaper, alternatively, If you have any questions or want to find out more, please reach out to the team we would be delighted to connect with you.

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.

Quotation start

There is a unique opportunity for value add real estate investors to directly benefit from the repositioning of older, inefficient stock, whist also decarbonising and future-proofing their portfolios.

Quotation end
Katherine Sherwin, Head of Real Assets Sustainable Investing

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.

Global Returns by Property Sector

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.

Geographical retail sales

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.

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Authors

Simon Durkin
Head of EMEA Real Assets Research
Thomas Mueller-Borja
Portfolio Manager European Real Estate
Tatiana Tezel
Portfolio Manager European Real Estate
Christina Lyndon
Portfolio Manager North America Real Estate
John Saunders
Head of APAC Real Estate
Evan Leslie
Head of Global Value Add Product Strategy & Investor Relations