How is the global real estate market doing today?
20. June 2022
- Real estate
- Institutional investors
Despite a significant recovery after the pandemic shock, the real estate market continues to be affected. Axel Vespermann, Head of Real Estate, Universal Investment, explains in an interview how the Covid-19 pandemic is affecting individual types of property, and prices and rents. He also discusses trends among asset managers and institutional investors, and reports on news from his area of expertise.
universal spotlight: Mr Vespermann, in last year's issue of universal spotlight you talked about how the real estate market has changed as a result of the CovId-19 pandemic. How does the real estate market look today, one year on?
Axel Vespermann: After the shock of the pandemic, the real estate market has recovered significantly, but is still influenced by the pandemic. How strongly these effects have been has depended on the respective country and the type of property use. Hotels, gastronomy and non-food retail real estate were affected much more than residential homes and local amenities. According to our observations, the winners of the current situation are clearly the former niche markets such as social and health care properties, micro and co-living properties, and logistics and data centres.
The rental market in the office segment is currently the most exciting sector. The pandemic has acted as a trend accelerator. Office space is in demand again. User behaviour is now shifting quickly, focusing on more flexible working, less classic office space yet more individual space, and layouts designed to encourage more interaction between employees.
There was also a recovery in transaction activity. The global transaction volume in 2021 was almost USD 250 billion, which is double the level from the previous year. Here too, there have been shifts towards residential, logistics, partly offices and the aforementioned niche markets. Some transactions were initially postponed and have now been made up for. We have also observed that security and stability are playing a greater role among investors again. This also includes the increased interest in core property locations. North America has become a region of increasing focus, primarily due to the greater economic dynamism of this market. Despite Brexit, London is once again the most sought-after office investment market in Europe. This may be partially due to higher levels of price volatility in this market at the height of the pandemic, leading to the base effects of recovery now being experienced.
What effects do you see for prices and rents, thus purchase yields?
Over the course of the year, we accompanied more than 150 real estate transactions worldwide. Overall, we saw stable prices, especially in the core segment. We also saw on average, valuations breaking even for the portfolios that we manage despite the pandemic. More importantly, the price level has also been supported by a lack of alternative assets (in relation to demand) and also high investor demand, which has not changed. Rents have also remained very robust overall, with some exceptions such as hotels or non-food retail. Stable prices and stable rents are of course also reflected by stable yields. The exception here has been for hotels and retail, where yields have risen slightly.
What are the most important trends that you and your clients, institutional investors and asset managers are currently concerned about right now?
The overall real estate allocations in investors' portfolios are growing continuously. However, many institutional investors are already reaching regulatory limits. Some want to push these limits in close cooperation with their boards, driven by the desire to further expand their portfolio allocation to real estate due to its relatively safe and stable returns. Another trend is the desire that many institutional investors have for greater international diversification, for example in new markets such as Korea. We are seeing a real boom in joint venture structures, participations or indirect investment such as through REITs, where investors can diversify broadly, even with a small investment. This is a reversal of the strategies applied by large investors in the past, who used to focus exclusively on direct real estate investments.
The pressure for rationalisation and digitalisation will also increase in our real estate division.
What is new in real estate at Universal Investment?
In the past financial year, our assets under management increased by well over three billion euros to more than 26 billion euros. During this period, we have significantly strengthened our teams, recruited experienced staff, and attracted young talent for our new real estate trainee programme. We continue to search intensively for new qualified employees.
Due to our internationalisation strategy, we also want to build up teams abroad, for instance in the Asia-Pacific region. Here, we had previously postponed expansion due to the pandemic.
Our clients' portfolios are becoming more international and we are adapting to this trend. Meanwhile, we are also investing a lot of time and money in the standardisation and digitalisation of our processes and the digitalisation of the real estate sector more generally. The pressure to streamline and digitalise will also increase in our business, which will probably lead to a consolidation of the market for service and master KVGs in the coming years.