What the vaccine, the US election and stock market surges mean for real estate investors
Since launching Active Capital, the world has undergone a further series of shifts. From summer recoveries to stock market surges, from the US election to news of vaccines.
5 minutes to read
Knight Frank’s William Matthews, Partner, Commercial Research, explains why the logic for investing in real estate continues, how new sentiment shifts are playing out on the ground, and why ESG continues to rise on investors’ agendas.
Q: How has the macro-economic landscape changed in the past few months?
William Matthews: First and foremost, it’s encouraging to see that many of the large economies around the world saw signs of recovery over the summer and into the autumn. There was a period in which Covid-19 cases were dropping quite rapidly, which caused the uncertainty from earlier in the year to subside somewhat – at least enough to incentivise businesses to look to the future again.
We saw that reflected in stock markets, too, which have continued to rise – albeit quite selectively. For example, we saw quite a clear divide between the tech stocks with potentially strong futures, and stocks in sectors that are more structurally at risk.
Then we had the US election, which ultimately brought an additional sense of calm, and then, more recently, we had the news of multiple successes in vaccine trials. It’s early days, but that has really been a shot in the arm for the global economy. We've seen stock markets react extremely rapidly, offering up some big gains, and what’s more, the greatest of those gains have been felt by sectors hit hardest by the pandemic, so we’ve seen a positive levelling out.
This improved sentiment is already reaching the bond markets. Bond yields had compressed to incredibly low levels, and were below zero in many large economies. However, that is starting to reverse now, with bond yields rising and yield curves steepening, which indicates a stronger outlook for the economy. Another way to look at it is that capital is leaving the perceived safety of government bond markets in search of more compelling opportunities for returns.
That opens up a really interesting question in terms of where that capital is now going to go, and we are convinced that part of it, at least, will be redeployed into real estate.
Q: So, is this a fundamentally different environment to where we were a few months ago?
WM: Absolutely. Investor sentiment is definitely stronger, and we’re seeing stock market volatility (which is something we measure on a daily basis) come down significantly. It’s still above long run levels, and there are still plenty of things that could cause it to rise again, such as political issues around Brexit and the fact that we’re entering a period in which lots of the lagging economic numbers are going worsen or turn negative, but fundamentally, the situation has improved significantly since the summer period.
But the backdrop to all of this is that the big structural trends that we were talking about this time last year are still very much in play. Although bond yields are rising at the moment, they are fundamentally still incredibly low – we don't expect that to change in the foreseeable future – and we also expect central banks to continue to keep monetary policy very loose. And so, for all of those reasons, the logic for investing in real estate continues.
When thinking about investment strategies, keeping in mind that idea of lower-for-longer interest rates will remain key. Focusing on highly liquid and high-quality assets is going to remain one of the preferred strategies – a defensive strategy, if you like – and really exacerbated by the impacts from the debt markets where lenders are becoming even more selective about the properties that they will lend on, particularly with respect to ESG credentials.
Q: Looking ahead to next year, what does this mean for global investment markets?
WM: One thing we absolutely know for certain is that the weight of capital with a mandate to be invested in real estate has not gone away. There's still a huge amount of unspent capital allocated to real estate but, for various reasons this year, hasn't been able to be spent.
We're still very big believers in the future of cross-border real estate investment – that's a feature of the market that is here to stay and it's going to grow in the very short term. Travel restrictions made that slightly more difficult, but one of our predictions in this year’s Active Capital is a strong level of activity between near neighbours – such as countries on the same continent, or those next door to each other.
It's likely that volumes in 2021 will exceed those in 2020, which was a relatively weak year in terms of overall activity.
Q: How are all these factors playing out on the ground now?
WM: Obviously, the number of large transactions globally has fallen this year. However, the impact on pricing has been modest, and there are examples of pricing strengthening on some assets since the beginning of 2020. So that, combined with the recent uptick in sentiment, means that we probably won’t see the more dramatic pricing movements predicted by some. But what we are seeing is the polarisation between the very resilient good quality prime stock in the right locations versus the slightly poorer quality stock in weaker locations, the latter of which is suffering, and will continue to do so next year.
Perhaps most notably, as every week goes by, the importance of ESG to investment decisions is growing. Though it’s growing at different speeds in different parts of the world, ultimately, it’s not a consideration that's going away just because we've hit a slower patch. As we explore in more detail in the report, one factor fundamentally driving this is lenders’ preference to engage with assets that have better ESG credentials.