The $1.2 trillion asset manager DWS group expects rental declines from the outbreak of Covid-19 to hit global commercial real estate values by between 10 to 20 per cent.
Simon Wallace, global co-head of alternatives research and strategy at DWS, said valuations would start to decline as more companies file for bankruptcy and unemployment climbs. He also said investment volumes had fallen dramatically led by Asia which was down as much as 60 per cent.
Even so, Wallace who has worked for the Deutsche Bank-owned money manager since 2011, expects the impact from the pandemic to be less than during the global financial crisis because office vacancy rates before the pandemic hit were well below historic levels. They’re expecting to see a U-shaped economic recovery over the next two years with property valuations starting to recover in 2022.
“The real estate market is in a much better position than 2008,” Wallace said in an interview from London. “You would need to see a 50 per cent increase in vacancy rates just to get back to historic levels.”
Wallace said DWS had not as yet seen “major” redemptions from institutions looking to reduce their allocation from both within the firm or more broadly across the market. And, even if an investor wanted to sell off some assets, the lack of transactions and liquidity in the market would mean they would be forced to sell at distressed prices.
While Australian super funds including Hostplus have looked to sell some assets to raise liquidity and rebalance their portfolios in the wake of the market selloff that erased billions of dollars in value, Wallace said there had been less of a scramble in the northern hemisphere, at least among UK pension funds.
DWS expects valuations for all major markets around the world to decline by a similar amount, though numbers vary widely between sectors. In Europe for example, DWS is forecasting a 5 per cent decline in value for both residential and logistics, a 15 per cent drop for offices and a 25 per cent hit to retail, a sector that was already in decline.
And despite the obvious structural challenges faced by the retail industry, the property portfolios of many institutions continued to replicate that of the MSCI real estate benchmark index which has roughly 30 per cent weighting to retail. This, Wallace warned, would act as a “consistent drag on performance.”
For now, he expects core property assets to outperform higher risk strategies and remains bullish on logistics, in particular so-called urban corridor logistics, thanks to the growth of e-commerce and continued supply constraints. (“It’s one of the few parts of the market that we expect to see rental growth throughout this crisis.”)
He also likes residential which today makes up less than 5 per cent of institutions overall property portfolios, thanks to stable rental collection rates which were at 90 per cent in Europe in April. That compares to just 30 to 40 per cent for retail property.