PGIM global head of investment research Peter Hayes (Photo: Matt Fatches)
PGIM global head of investment research Peter Hayes (Photo: Matt Fatches)

Societal changes in demographics, urbanisation and work patterns have affected how real estate is used and valued, and investors must evaluate potential assets with care at this point in the cycle.

Global returns from property are forecast to be 4.8 per cent from 2018-27, driven by low yields, weak productivity growth, low inflation and some over-supply, PGIM global head of investment research Peter Hayes said at the Fiduciary Investors Symposium in Healesville, Victoria, in November.

Investors are “worried” about a range of factors, mainly rising interest rates, Hayes said.

“Investors have been nervous for a long time,” Hayes said. “They’re trying to be defensive, they’re trying to focus on megatrends, and they’re trying to focus on the drivers of need in real estate. What has happened in transaction volumes, in capital raising, is that investors have been happy to be patient with their capital, even dry capital.”

Hayes noted that transaction volumes have been about US$200 billion ($276 billion) per quarter, with few assets coming to market and few deals being done.

“Without a doubt, this real-estate cycle has been about investors focusing on [secure income] in the major cities,” Hayes said. “That has been a driver behind the themes that have developed over the last few years. And as the society changes, ageing population, urbanisation, and the growth in technology give rise to opportunities like logistics, like multifamily [apartment dwellings]. Investors are, of course, looking for higher yields, but they’re not going to emerging markets, as they did last time. They’re not taking on debt, like they did last time. They’re looking at operator models and this brings new risks.”

Hayes said the global real estate market was heavily concentrated across eight markets, with the US, Japan and the UK as the top three destinations.

He noted that for every narrative around the risks of individual real-estate sectors such as multifamily dwellings, senior housing, office, retail and industrial, there were still opportunities.

For the moment, however, investors are sitting on capital that would normally be allocated to real estate, Hayes said.

“It’s even hard to know how much money is out there waiting because it’s collected from different sources,” he said. “The question is, how long will this patient capital wait? This is often the question we get asked – when will the real estate cycle end?

“At the moment, there’s enough uncertainty for investors to be thinking let’s wait. Brexit is a big issue here, because the UK is the third-largest investment market in the world, behind Japan and the

US – about US$750 billion [$1.04 trillion]. There’s a lot of capital thinking, ‘We’ll be patient waiting for Brexit.’ ”

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.