Real estate investment lessons from 2021

TIMOTHY RANGONGO Editor: MoneyMarketing

Real estate was one of the sectors worst affected by the Covid-19 pandemic as global economies screeched to a halt following the closure of stores, restaurants, offices and hotels, among others. Lockdown regulations meant people could no longer meet, work, eat, shop, and socialise as they used to.

Nevertheless, not all real estate assets performed the same way during the crisis. Assets with greater human density were naturally hit the hardest, such as healthcare facilities, regional malls, accommodation, and student housing. By contrast, self-storage facilities, industrial facilities and data centres faced less significant declines.

To try and make sense of the lopsided impact of the pandemic on global real estate, including some of the valuable lessons to have emerged from the asymmetry, MoneyMarketing spoke to Jamie Boyes, portfolio manager of the Catalyst Global Real Estate UCITS Fund, which provides access to high quality, international real estate assets with the aim of benefitting from capital appreciation while also delivering solid foreign dividends.

The range of global real estate

One of the big misconceptions globally, and especially from South African investors, is that real estate is all offices and retail, with a little bit of industrial, says Boyes.

Not all real estate assets performed the same way during the crisis

“It is far more diverse than that. There are far more speciality sectors, some of which have benefitted quite significantly from Covid – sectors such as residential, industrial warehousing, storage, lab space, towers, and data centres.”

There are sub-sectors where some of the trends have been accelerated by Covid and are in a better place than they were about two years ago. Data centres and towers are the infrastructure that store and carry the data we see on our various screens. Due to our reliance on telecommunications and work-fromhome initiatives during Covid-19- related lockdowns, demand for such infrastructure increased. Ecommerce also grew at an unprecedented rate across the globe, driving investment in distribution facilities, for instance large warehouses run by ecommerce companies

Sticking to conviction

One of the biggest lessons for Boyes is something we always think about, he says.

“We always think about real estate investment on a long-term basis, how we value businesses in five to ten years, and thinking about some of the longerterm issues: What is the medium- and long-term growth like? What are the risks you are taking?

“If one goes back to when the vaccines efficacy breakthrough was made at the end of last year, there was a rally in lodging and travel stocks until about March/April 2021, on the hopes that a vaccine could soon return economic life back to normal. However, some of these were what one would consider to be poor-quality assets (highly leveraged balance sheets).

“The biggest difficulties were to stick to our conviction of where we saw value in the market. You saw a lot of highly leveraged offices and retail. Some of the hotels rebounded strongly and we thought it was quite heavily overdone, with a lot of momentum behind that.

“Basically, people were making a macro call,” says Boyes.

He says that if you have a robust process you have been using and you believe in it, you ought to stick to the conviction of where you see value, even during tough times.

Which is good because from April onwards, we saw a bit of a reversal, he says.

The biggest difficulties were to stick to our conviction of where we saw value in the market

The unforeseen

The recovery in retail in the US caught the team off guard, though.

“We had underestimated how strong that would be. We thought it would come, but not as quickly and successfully as it has now. How long the momentum will last is the biggest question.”

Much of the credit for retail’s surprisingly strong performance through the pandemic is due to the unprecedented level of multiple US government support packages. The multifaceted largess ultimately totalled some $6tn in stimulus and other forms of federal government spending.

Retailers also benefited directly from government programs like the Payroll Protection Program (PPP), which provided a critical lifeline to millions of small businesses. “US storage also surprised us.” Storage relies on disruption – getting divorced, moving house or death in the family, for example. It is life events that create demand for storage.

“The pandemic was a life event that did create demand – we underestimated how long term that would be. There have been short-term users of storage that may go away, but the biggest users the pandemic has created is in the decluttering of homes to create office spaces.

“That has created a longer tailwind of demand for storage. We did really nicely out of European storage, but we were probably not as bullish on how good and for how long the growth would be in US storage.”

Closely watching the office space in 2022

“Although we won’t get an answer on this in the first or second quarter of next year, what is interesting is just how the office environment plays out and how that impacts office landlords in the next two to four years,” says Boyes on their watchlist for 2022.

Boyes says they are significantly underweight offices and, on the margin, more bearish on the space than the market is. “We think that it is going to be reasonably tough, but just seeing how that plays out is something we are thinking about a lot.”