I am Article Layout

Select your investor profile:

This content is only for the selected type of investor.

Individual investors?

investing in core plus real estate

July 2022
Marketing Material

European real estate: the core plus opportunity

In a world of volatile markets and rising inflation, core plus real estate can offer investors diversification benefits, inflation protection and a strong, sustainable income stream.

It’s been a tough first half of the year for investors. Inflation is rising, markets have been volatile and assets that do not normally move in lockstep with one another have done precisely that, complicating efforts to maintain diversified portfolios. 

In such an environment, real estate stands out for its ability to generate returns that are not highly correlated with those of either equities or bonds (see chart).

Diversification benefits
real estate correlation
Source: Pictet Asset Management, as at 31.12.2020; Real Estate: NCREIF Property Index; Global Equity: MSCI World; EM Equities: MSCI EM; Govt Bonds: JPMGGBI; Corp Bonds: Barclays Glb Agg Corp TR; REITS: FTSE NAREIT All Equity REITS TR. REITS = Real Estate Investment Trusts. Please note that past performance is no guarantee of future performance.

And even though it is not a perfect hedge against inflation, real estate does offer some protection from rising prices in the shape of inflation-linked rents.

Moreover, the investment opportunities within real estate are broadening, chiefly because what businesses and householders want from the built environment is changing.

Demand for more efficient, environmentally-friendly commercial and residential buildings is growing, while leaps in technology and new flexible working practices mean people now have different needs when it comes to their homes, offices and leisure destinations.

Core plus real estate portfolios offer a route to capitalise on such opportunities. These investments not only benefit from secure, long-term rents but also offer the potential to boost returns through building refurbishment, repositioning or re-development.

Green opportunity

In the wake of the pandemic, people are more aware than ever of the need – and the urgency – to protect the environment. Real estate has a big role to play here. In the European Union, buildings account for 40 per cent of total energy consumption, 36 per cent of CO2 emissions and more than half of the region's electricity use.1 That’s in part because many of the buildings are old and don’t have the latest efficiency features; more than 40 per cent were built before 1960, and 90 per cent before 1990.2

Of course, constructing anew might be tempting, but that comes with its own sizeable environmental footprint. The greener option can often be to refurbish an existing building. A study found that new homes gave off 50 tonnes of CO2 during the building process, while refurbished ones gave off just 15 tonnes, and that it took around half a century to close that emissions gap.3

Already, sustainable properties are starting to command a premium – occupancy is, on average, 4.3 per cent higher in green-certified buildings, while rents are about 4.6 per cent higher, according to a review of data across the developed world. They also have lower operating costs and higher sales prices.4 The improving economics in part reflects the fact that at growing number of institutional investors are now only investing in green buildings – creating a potential market for any refurbishments undertaken by 'core plus' funds.

Socialising and shopping

Social trends have also been accentuated by the pandemic. Offices are now increasingly requited to be more flexible, geared more towards people meeting by chance during the days that they are in the office, which means a larger communal area footprint. Major capital cities in Western Europe should continue to do well, but some other key gateway cities (such as Birmingham, Manchester, Gothenburg or Lyon) may benefit from more flexible working practices due to their more affordable living, work and travel costs.

With people doing more online than ever before, we expect to see continued growth in demand for logistics properties. Research from CBRE suggests that for each incremental USD1 billion increase in e-commerce sales, an additional 1.25 million square feet of distribution space is needed.5

More online shopping, meanwhile, means less traditional retail, with change of use of what were once commercial retail outlets to residential or other services. This is more likely to be fertile ground for higher-risk real estate strategies (value-add and opportunistic). However, core plus investors could still potentially tap into the trend by looking at mixed-use buildings with a retail component which can be transformed over time.

By combining tactical refurbishment and active ownership practices with investment in strong, core assets, core plus real estate can thus offer attractive returns, a sustainable income stream, a contribution over time to improving emissions, and a degree of inflation protection.