Hines is primed and ready to capitalise on buying opportunities this year, according to global chief investment officer David Steinbach, but he urged real estate investors to be “sober-minded” as negative headlines look set to continue for now.
The good news, he said in the company’s global outlook, published today, was: “We are in the opening innings of a new chapter of investing, not the final ones of the last cycle.
“Opportunities will abound this year, which we can confidently pursue thanks to our financial flexibility. However, real estate is going to look different, and being able to separate the winners from the losers will never be more important.”
He added that quality would outperform lesser properties and customers would value simplicity and flexibility. Tighter bank lending standards would also favour well-established, vertically integrated managers, such as Hines, he argued.
Steinbach identified demand for zero-carbon assets as a key growth area – and one that many market players were unprepared for.
“Looking ahead, we are keenly aware that decarbonisation remains a blind spot for the market, one that we intend to take advantage of as it gradually becomes top-of-mind. We believe those investors with the skills, expertise, and insight to recognise customer desires and address their pain points will be uniquely rewarded,” he said.
Hines’ Navigating the Labyrinth report identified signs for investors to pivot strategies, including improvement in transaction volume, rising availability of traditional debt, and cost-averaging down.
“If you are an investor simply waiting and hoping for rates to change, that may prove to be a poor strategy,” Steinbach said. “The market is correcting, and now is likely the defensive time to shore up assets. While it is difficult (and probably too early) to call a bottom, cost averaging down has proven a successful strategy during previous downturns. Eventually, more accretive opportunities are likely to emerge.
“The global economic discord may persist longer than we prefer or expect. At times, it may even feel like we are stuck in a confusing labyrinth without end.
“But like expansions, downturns always end, and the path back to strong performance typically prevails for patient investors.”
Hines’ sector analysis
Americas
Investors are still recalibrating their portfolios, as they have seen downturns on both the equity and fixed-income sides of their ledgers. Tenants have been reviewing their growth plans for the year ahead and pausing on new activity, however, there is potential for opportunities during the second half of the year, including:
• Industrial: Industrial fundamentals are still strong in most markets, but demand will drop if discretionary consumer spending is negatively impacted by the downturn. The most interesting opportunities are in high-barrier markets where yield premium to acquisition value is substantial.
• Office: Continued caution is warranted as the full impact of hybrid schedules has not been fully absorbed. Flight to quality will remain evident in new development performance as a better designed, modern, sustainable product.
• Living: Careful submarket selection is paramount, as some markets are oversupplied, and affordability ratios are elevated. Secondary and tertiary markets may provide outsized opportunities arising from migration trends, and there is continued demand for larger units, activated green spaces and single-family rentals.
• Retail: Compelling opportunities are emerging to redevelop dated retail for the highest and best use, such as grocery-anchored, lifestyle and open-air service-oriented retail offerings and last-mile logistics.
Asia
Against the backdrop of this year’s macroeconomic and political headlines, the rebalancing of real estate product types has largely played out. Trends have indicated that the real estate industry’s main sectors may converge further. Opportunities exist in:
• Industrial: Demand for logistics space remains strong to address e-commerce demand, and as Asia’s economies become wealthier, there is a need for more cold-storage facilities.
• Office: Assets have seen strong growth in high-value locations. While Asia has not been hit as hard by working from home or hybrid schedules, attracting new tenants to office spaces will require a new creative dimension of user experience.
• Living: Rental demand continues to grow in markets where homes have become increasingly unaffordable; this includes developed markets such as Australia, Korea and Japan.
• Retail: Yields for retail assets have been attractive relative to other property sectors. Increased stability in retail fundamentals will continue as vacancies and rents have been stable or moving in the right direction.
• Emerging sectors: Sectors such as life sciences are institutionalising, suggesting higher income yields and growth prospects.
Europe
As we look at strategies for 2023, the “beds and sheds revolution” of recent years has played out. There is no longer a standout winning sector. Our ability to understand nuances of quality within a product type has become more important than just picking the right general bucket. Opportunities will include:
• Industrial: As capital demand normalises, focus is expected to return to individual assets and location quality.
• Office: The future of the office debate continues with a focus on a flight to quality – with occupiers seeking a path to net zero. This means there is a smaller pool of viable assets, yet a focus on prime buildings given ESG should outperform older assets.
• Living: Mainstream residential is losing its appeal as yields tighten and heightened regulation (eg, Ireland, Netherlands, Germany) has restricted rental growth. However, niche product types such as senior living, student housing and serviced apartments maintain their appeal.
• Retail: The sector is faring better than expected. Negative sentiment has resulted in attractive pricing; however, new economic headwinds and uncertainty will delay a quick sector rebound as consumer confidence continues to draw back.
To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews
