In the midst of the COVID-19 outbreak, a panel of experts joined a Real Deals webinar to assess how real estate investors are reacting to volatile markets, why real estate can serve as a hedging tool in uncertain times and what the future holds for the asset class after the virus peaks.

THE GUESTS:

• Alastair Balfour, Partner, Metric Capital Partners
• Ian Houston, Partner, St Bride's Managers
• Stuart Pinnington, Group Fund Client Services Leader, IQ-EQ
• Stephanie McMahon, Head of Research, Senior Director, BNP Paribas Real Estate

The webinar can be found here.

The COVID-19 pandemic has had a profound impact on financial markets, with equities suffering their largest falls in more than three decades, M&A grinding to a halt and debt markets shutting down.

In the midst of this global uncertainty, real estate investments could serve as both a hedging tool and a source of yield through an extended period of low interest rates.

BNP Paribas’s Stephanie McMahon, St.Bride’s Managers Ian Houston, Alastair Balfour from Metric Capital Partners and IQ-EQ’s Stuart Pinnington joined a recent webinar broadcast session hosted by IQ-EQ in association with Real Deals to discuss how real estate is positioned in times of volatility.

Here are some of the highlights from the discussion:

Real estate performance: past and present

BNP Paribas’ McMahon said that preCOVID-19, real estate had delivered superior performance to bonds in terms of total returns over the last 10 years. McMahon said that in seven out of the last 10 years, low bond rates had made a good case for pivoting towards real estate, but pointed out that total real estate returns at the end of 2019 were around 0.6 per cent, down from 5.1 per cent in the prior year.

If real estate was to fully deliver on its potential, building a portfolio with the right asset types and income streams was essential. “It really comes down to the two key factors of real estate… asset type and income. Performance is hugely divergent across the asset type. If you look at 2019, for example, there was 17 per cent total return in UK industrials versus negative 8 per cent in retail. Income was less divergent, with real estate delivering 5.2 per cent across all asset types,” McMahon said.

Although it is too early to assess the full impact of the spread of COVID-19 during the first quarter of 2020 on real estate, St. Bride’s Manager’s Houston said that since the start of the year, there was strong evidence of a flight to quality assets with long-income from UK investors. He added that these trends had already taken hold last year amid Brexit uncertainty, with investors shifting out of retail and into industrials.

Real estate as a hedging tool and scope for differentiation

IQ-EQ’s Pinnington said that in volatile markets investors flocked to assets offering stability and yield. With bond markets underwhelming, the right mix of assets in a real estate portfolio could quite reasonably be expected to deliver yields of between three and five per cent.

“It comes down to the phrase ‘safe as houses’. Is that really true? It depends on what sector within real estate we are talking about; but I think there has been a global recognition by investors that it is a safe investment based on various contingencies,” Pinnington said. “Another factor to consider is the huge diversification available within real estate. You have different assets – industrial, residential – but there is also the jurisdictional play.”

Metric’s Balfour said that the period of low interest rates and strong fundraising in private markets had prompted his firm to move towards real estate to avoid high asset prices and weak covenant structures on financing for buyouts. “How do you play in a market where there are few covenants and debt is cheap, with the ability to sleep at night? We took a view that real estate was a good hedge for the macro environment,” Balfour said.

The firm has subsequently invested in the selfstorage sector, which offered real estate characteristics, but also value-add over and above the asset on its own, with management and the building of scale across a portfolio added additional growth levers.

Life after COVID-19: where real estate capital will be invested

The panel all shared their thoughts on where capital is likely to flow within real estate during the next 20 years.

Pinnington flagged healthcare and retired living assets, as people are living longer. The strong performance of the healthcare sector historically will also support investor confidence.

Houston said St.Bride’s also had retired living as a growing area, as well as infrastructure. Houston also cited impact investment as a long-term trend, with capital seeking real estate investments that combined financial returns with positive social outcomes, such as social housing.

Along similar lines, McMahon said carbon mitigation was a key theme on her radar, as real estate would have to find a way to reduce its carbon emissions in order to remain sustainable. The use of rural spaces and natural materials would be crucial considerations for real estate, McMahon said.

Balfour said that his firm’s existing investment in self-storage was built on a long-term view of the future, with modelling showing that the European market would mirror the rapid expansion of self-storage that has already taken place in the US.

To listen to the webinar, please follow this link