After several years of predictability, 2020 was one of the most tumultuous years in recent real estate history, and 2021 looks set to be equally uncertain.
Coronavirus vaccines, social impact, climate change and what constitutes a mainstream real estate sector will be on investors’ minds in the new year, according to UBS Asset Management. Here are the investment bank’s top 10 real estate questions for 2021.
This is the central question for much of humanity, not just real estate. UBS’s base case is that “vaccination will be effective, become widely available in 2021 and allow the economy to gradually recover to sustained growth.” This will support real estate occupier demand and investor confidence, it said.
If the vaccine is rolled out more quickly than expected, leisure and hotels will see the biggest benefit. If it is slower than expected, well, 2021 will be “lacklustre,” the polite term used by UBS. If the virus mutates and proves resistant to the vaccine, “This could see the pandemic endure and ultimately force society to adapt to live with the virus on a permanent basis, radically altering the way we live.” Best not to think about that too much.
The pandemic has shown that the income component of real estate can be risky. But in a world where central bank stimulus keeps stock prices high and bond yields low, prime real estate where the income is very secure will continue to be highly desirable to institutional investors who need to pay out liabilities, and so capital will keep chasing the sector and liquidity will remain high, UBS said.
Spoiler alert: no. As long as vaccines are effective and the world returns to something like normal, jobs will still remain in cities, which means people will still want to live in them. UBS predicts people will come into the office less but that totally remote work is unlikely to take off, especially among younger workers who need to be in the office to learn and forge relationships.
Despite the above, we’ll be using offices less in the future, UBS said. The desire to work remotely at least part of the time will stick, and companies are planning to reduce their office footprints, which will bring swathes of grey space onto the market. Offices will need to beef up their social interaction space to entice people in.
The coronavirus pandemic has highlighted some major gaps in the social infrastructure of countries like the U.S. and UK, particularly regarding the quality of housing for the poor, elderly and vulnerable. Real estate has the ability to fill some of these gaps, UBS said, and the pandemic will catalyse the interest in social impact investing that was already manifesting. The same is true of real estate firms taking necessary steps on diversity and inclusion.
Logistics was on a tear even before 2020, but the pandemic put a rocket under demand for the sector from occupiers and investors, with yields in many markets now below 4%. So, is that too expensive? On the one hand, short-term increases in demand are part of a wider structural shift in the sector’s favour, which should help demand endure, UBS said. On the other hand, the bidding on some deals has an air of clamour about it, “which questions the robustness of some of the underwriting,” according to UBS. In the foreseeable future, the bank decided, the sector will remain robust.
“Following the onset of COVID-19, initially there was a freeze in the market as lenders struggled to underwrite deals,” UBS said. The money to be made by the spread between low interest rates and high lending margins was offset by worries about where values were heading, particularly in office and retail. In these two sectors, margins are up by about 25 basis points, while loan-to-value ratios are down by about 5% to 10%. Logistics, however, has seen increased interest. UBS said there is money to be made lending to good assets at high margins, but care needs to be taken that you don’t back the wrong horse.