Will Robson, Executive Director & Head of Real Estate Solutions Research at MSCI explores the international trends in real estate.
- The COVID-19 pandemic has significantly accelerated a number of secular shifts that were already starting to have fundamental impacts on the role real estate plays in the economy as well as in investment portfolios.
- Such disruption increases the need for evolving data and analytics to understand the rapidly changing drivers of performance and risk consistently across all types of real estate investments.
- Despite a long list of difficult questions facing the asset class, climate change and its impact on risk and return are more important than ever for real estate investors.
As we move beyond the initial impact of COVID-19 in 2020 and look to how the world may emerge from the pandemic, 2021 could be a significant year for real estate markets, with changes that could reshape real estate investment. The COVID-19 pandemic has simultaneously caused a severe and rapid economic contraction and significantly accelerated a number of secular changes that were already hitting parts of the real estate markets hard. This double whammy has stopped investors in their tracks and poses some fundamental questions for how real estate will evolve as a sector of the economy and as an investment asset class.
Five Key Real Estate Trends for 2021
1. Disruption Sped up by COVID
Lockdowns and social distancing have dramatically reduced retail foot traffic and forced many already-struggling retailers into bankruptcy. The pandemic may supercharge disruption from flex-office providers by forcing many employees out of the office, as their managers fundamentally reassess their
businesses’ space needs. Since proximity to work has been a major factor in residential decisions, this may also impact the choices employees make about where and in what types of housing to live. Owners of real estate are likely to have to work much harder to provide compelling offers for their tenants. This in turn may change the nature of their cash flows and hence the fundamental characteristics of the asset class.
2. A Factor Perspective on Performance and Risk
Against the backdrop of such accelerated disruption, the characteristics distinguishing winners and losers will become more varied. The status quo of largely sector- and geography-based performance attribution will only explain so much. A fuller analysis will require more data and new analytical techniques. Some factors will be unique to real estate markets, and investors are increasingly keen to understand the common risk factors that drive performance across all asset classes, including real estate.
3. A Finger on the Pulse of Real Estate Pricing
During the early stages of the pandemic, listed real estate markets reacted violently. On the other hand, movements in private-market valuation have, in the main, been relatively muted. Whether there was under- or overreaction in either market, lack of frequent valuation or pricing information has had private real estate investors searching for market intelligence. Illiquidity and pricing uncertainty can make life more difficult for investors, especially in light of pandemic-related uncertainty. Investors will likely be paying extra-careful attention to pricing indicators.
4. Consistent Analysis Across the Risk Spectrum
The pandemic has reminded us that all real estate assets are exposed to similar systematic occupier, financial and economic drivers. Given that, investors are likely to demand more transparency and cohesive analysis across their portfolios to stay on top of the disruption and risk. For example, core, open-end and opportunistic closed-end funds seem very different on the surface. They exist at opposite ends of the real estate risk spectrum and have significant strategic and structural differences that have resulted in their being managed and analyzed in very different ways. To get a full picture of the risks investors are exposed to across their whole real estate portfolios, analytical techniques will have to become more consistent.
5. Climate Risk: More Important than Ever
Despite the pandemic and the very significant short-term challenges faced by real estate investors, they have not been distracted from another all-encompassing challenge — global climate change. In fact, the pandemic has highlighted the dramatic and wide-reaching impacts that seemingly nonfinancial and difficult-to-quantify risks can have on a portfolio. Investors are realizing, to a greater extent, the need for systematic approaches that integrate climate analysis into their investment processes. In 2020, COVID-19 raised many fundamental questions and challenges for investors to tackle through 2021 and beyond. Such questions increase the need for evolving data and analytics to understand the rapidly changing drivers of performance and risk consistently across all types of real estate investments.
- 2020 Emerging Real Estate Trends
- MSCI Real Estate Research Snapshot Part 1
- MSCI Real Estate Research Snapshot Part 2
Author | Will Robson
Executive Director & Head of Real Estate Solutions Research, MSCI