Active managers should consider real estate’s key ‘mega-trends’
At the Schroders Global Real Estate Conference held yesterday in London, Duncan Owen, Global Head of Real Estate, addressed an audience of over 200 people on where growth can be found and how asset managers can add value despite ongoing economic uncertainty. Following another good year for real estate returns, Duncan and the panel revisited the five key mega trends for real estate identified in 2015:
- Rapid urbanisation – the UN forecasts that there will be 40 global cities by 2025.
- Demographics – it is anticipated that by 2025 the world population will have grown by 1 billion.
- Technological revolution – ecommerce, the internet and innovation is changing the demand and value of locations.
- Resources and power – global energy demand will be 50% higher in 2030.
- The shift from West to East – the GDP of the E7, the largest emerging markets, are forecast to overtake the G7 by 2030, changing demand for real estate.
Despite these mega trends remaining unchanged from last year, the panel looked ahead and identified that economic uncertainty persists with issues such as China’s stabilisation, the potential for a ‘Brexit’, political instability in Brazil and oil prices all providing major economic headwinds. Due to this, active asset managers need to look at investment opportunities through the lens of these trends.
Tom Walker, Co-Head of Global Real Estate Securities, presented on opportunities in ‘Global Cities’ which are aligned to Schroders’ mega trends. He believes these cities should grow at significantly faster rates than their home countries over the next 10 years. Tom commented:
“Cities such as London, New York, Paris, San Francisco and Shanghai are typically characterised by growing populations, clusters of young professional and specialist sectors and greater market liquidity. Asset managers will need to focus on the key areas in these cities which have the best growth potential such as Manhattan in New York, which is filled with office workers by day and entertainment seekers by night.”
Keith Wade, Schroders’ Chief Economist, provided his views for the global economy and stated that the outlook for the immediate future looks subdued. He commented:
“This year we are still looking at global growth standing at 2.4%, with falling oil prices not having boosted world trade as expected. Furthermore, China’s ‘old economy’ is heading for recession and whilst domestically focused sectors should ensure that there is no hard landing, there may be a wave of deflationary pressure. This may also be the year that ‘helicopter money’ arrives with central banks directly pumping money into the economy, bypassing banks, having come to the limits of monetary policy.” Keith also highlighted that the significant gap between interest rates and national income growth creates a powerful incentive for investors to consider real assets.
Mark Callender, Head of Real Estate Research, presented ‘European Real Estate Market Prospects’ - which ultimately depend on the wider economy. Mark commented:
“In the UK, economic growth of at least 1.5% should mean that overall real estate returns remain positive whilst in Europe a recovery gaining momentum, a yield gap over bonds and widespread rental growth in cities should see support for real estate.” Mark noted the importance of selectivity, with London shops, office space outside of the City of London and multi-let industrial estates set to prosper.
Nick Montgomery, Head of UK Real Estate Investment, addressed the audience about the importance of active management in long term value creation. He provided examples of development and refurbishment initiatives in London, Manchester and Milton Keynes that have achieved attractive income and total returns. Nick commented:
“Performance will increasingly be driven by rental value growth. We therefore adopt a disciplined approach to investing in clever towns and cities, targeting buildings offering good fundamentals in terms of location and specification. This approach combined with asset management should deliver long term outperformance.”
Tony Smedley, Head of Continental European Investment, looked at long term value creation in Continental Europe where the background looks positive with employment and retail spending growing as well as the economy expanding, albeit slowly. Tony explained that:
“We are investing in the cities that people want to be in and where vacancies are low and rental growth is coming through. We seek future-proof assets and areas with good infrastructure, a healthy quality of life, limited supply and affordable rents.”
Alternative investment opportunities in real estate were presented to the audience by Graeme Rutter, Head of Schroder Real Estate Capital Partners. He stressed that these are not properties such as traditional high street retail and industrial real estate but instead areas like student accommodation, housing for the elderly and car showrooms. Graeme commented:
“These are areas that tap into several of the identified key themes such as demographic and social change and offer inflation-beating income at a time when the cycle is moving towards rental growth. These properties should be a way to ride new trends such as self-storage and recycling.”
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Notes to Editors
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Schroder Real Estate
Schroders has managed real estate funds since 1971 and currently has £11.8 billion* (€14.8 billion/ US$16.6 billion) of gross real estate assets under management as at 31 March 2016.
Most of the real estate funds referred to are unauthorised collective investment schemes as defined in the Financial Services and Markets Act 2000. Promotion of these funds is restricted and access to full information about these funds is only available to those exempt from the restriction.
For further information about Schroders’ real estate business visit www.schroders.com/realestate
*Real Estate AUM includes cross holdings in certain Schroder managed real estate funds.
Schroders is a global asset management company with £324.9 billion (€409.7 billion/US$466.9 billion) under management as at 31 March 2016. Our clients are major financial institutions including pension funds, banks and insurance companies, local and public authorities, governments, charities, high net worth individuals and retail investors.
With one of the largest networks of offices of any dedicated asset management company, we operate from 38 offices in 28 countries across Europe, the Americas, Asia, Middle East and Africa. Schroders has developed under stable ownership for over 200 years and long-term thinking governs our approach to investing, building client relationships and growing our business.
Further information about Schroders can be found at www.schroders.com.
Issued by Schroder Real Estate Investment Management Ltd, which is authorised and regulated by the Financial Conduct Authority. For regular updates by e-mail please register online at www.schroders.com for our alerting service.