The fund benchmark, the FTSE EPRA/NAREIT Developed Rental Net Total Return Index, recorded a net total USD return of 3.87% for the month of December. The best performing listed real estate market was The UK which recorded a total USD return of 6.39% for the month. Canada recorded the lowest total USD return of -0.58%.
For the full year, the benchmark recorded a net total USD return of -8.84%. The best performing listed real estate market was Singapore which recorded a total USD return of 3.50% for the year. Australia recorded the lowest total USD return of -12.30%. The best performing sectors globally were Data Centres (19.4%), Industrial (16.3%), Lab Space (13.3%), and Storage (11.6%). The worst performing sectors were Malls (-31.8%), Hotels (-27.5%), Strip Retail (-21.5%), and Office (-17.6%).
As we start a new year, we take this opportunity to take stock of what transpired in the global real estate market last year, where we currently stand, and the outlook for the asset class.
It is fair to say that the COVID-19 pandemic, and resulted government mandated lockdowns, is the most drastic shock that the global economy has experienced since World War II. Practically every person on the planet was affected to some extent. The way we work, live, shop, communicate, and have fun all changed dramatically, practically overnight.
The economic impact of the lockdowns has been unprecedent, leading to the biggest contractions in economic activity on record. The economy is not just some abstract concept to which our wealth and prosperity is tied. “The economy” is the name we assign to that system that produces all the goods and services we as humans desire, some of which are vital for survival, others are nice to haves.
Real estate is a critical component of this economic system. It literally houses virtually all our economic activity. We all live somewhere. We all work somewhere. We all shop somewhere, either in store or via the internet with goods shipped through distribution centres. We all communicate somehow, with our data flowing through data centres or cell towers. Most of us travel, either for work or leisure, we stay in hotels, holiday homes, or apartments. We all get sick and need to go to a doctor or a hospital. We all will get old and need to be cared for, most probably in a senior home care facility. What we do is the economy. We use real estate as a means to an end.
The pandemic induced government lockdowns have forced us to live and work differently. It has also forced many of us to reconsider how we live and work, not just now, but into the future. The pandemic has forced most users of real estate to re-evaluate how they use real estate. This sudden re-evaluation has resulted in a shift in value we subscribe to different aspects of real estate. Suddenly an extra room at home to work in has become more valuable than before, and the value ascribed to the coffee shop servicing office workers in a central business district has become a lot more uncertain.
It has often been said that the pandemic accelerated trends that were already in motion.
Examples of these include:
- Flexible working arrangements, whether working from home (WFH) or in flexible office arrangements like WeWork
- Online shopping penetration
- Reconfiguration of retail landscape
- Increase in consuming virtual products and more data
- Communicating virtually instead of in person
- Millennial migration from urban cores to the suburbs
Less often talked about are trends that were slowed, stopped, or reversed:
- The appeal of big cites, especially the dense urban core
- Experiential retail
- Face to face meetings
- Leisure and business travel
- Just-in-time supply chains
- Mass transit use
Many of these trends that were slowed or reversed will be temporarily, whilst some others will have a more lasting impact on how we conduct economic activity and the resultant effect on real estate values. Cities have existed for millennia and the trend of urbanisation is as old as civilization itself. Cities are crossroads, places where people come together to exchange goods, products, ideas, and socialise in the most efficient manner. There is no doubt that technology enables us to perform some of these functions without the need to be in a city. However, we believe that this is on the margin and that the appeal of cities from a live, work, and play perspective will continue to attract people once the current pandemic subsides. This too, shall pass.