The case for investing in commercial real estate is being augmented by particular features of the current economic climate, argues a new paper from global real estate advisor, CBRE.
The report discusses the fact that against the background of the Eurozone crisis and GDP growth downgrades, both prices and investment activity in the commercial real estate sector have held up remarkably well and institutional allocations to property have continued to increase. This is particularly due to the risk/reward characteristics of real estate, the diversification element it provides to portfolios, and the fact that the asset class is somewhat under priced, relative to gilts, gold or equities at the moment.
Michael Haddock, Senior Director, EMEA Research & Consulting, CBRE, commented: "Uncertainty is the prevailing theme of the current economic environment and one of the major benefits of real estate is that it offers a positive investment case, not just against the most likely economic outlook, but also against a number of other scenarios, whether the Eurozone crisis continues with no clear resolution, in an inflationary environment, or in a full blown recovery. While other asset classes might produce better returns under specific outcomes, real estate performs under multiple scenarios, making a strong case for investors to overweight property at his time."
CBRE considers that portfolio characteristics are the specific lead attraction of real estate at the moment. As a physical asset that also earns income, even in the most extreme cases it is unlikely that an investor would experience a total loss.
The experience of the Lehman collapse provides a clear example of this. It is unlikely that bondholders or shareholders will get a substantial return from the winding up process. Even senior bondholders are expected to see a return of less than 25c on the dollar.
Contrast this with the position of the former owners of Lehman's UK headquarters. The administrator continued to pay most of the rent while the European operations were being transferred to Nomura, with Lehman's sub-tenants in the building providing additional security of income. Subsequently, the building itself was sold to JP Morgan for £495 million (approximately 612 million).
Indeed, over the last five years, investors would have been better off owning the buildings occupied by banks rather than shares in the banks themselves. At times of high market uncertainty and volatility, this downside protection is a quality that is highly valued by investors.
Source: FTI Consulting