Business & Investment

Identify specific assets, not sectors

Identifying the winning sectors and regions in real estate can be problematic in that many sectors and regions are cross-correlated. In addition, land, and in some cases buildings, are often beneficially reused for alternative uses, increasing the chances of choosing inventory.

AEW UK REITs outperform MSCI / AREF UK PFI Balanced Fund Quarterly Real Estate Index in 6 months, 12 months and 3 years, but continue to light sector weights, industrial overweights and high street retail It is not considered to guarantee that. success. Instead, we believe that valuing individual properties based on basic characteristics and the opportunities presented for asset management is the driving force behind our performance. Due to the uncertainties caused by pandemics, especially in the current situation, investment strategies that focus too much on sector weighting can be fundamentally risky.

The industrial sector has seen a continuous increase in value in recent years, delivering excellent profits. However, we keep in mind how demand is reducing yields and making it difficult to find value-added initiatives. Logistics was also strong, but we expect this to lead to increased supply, which could begin to affect the level of rent growth and ultimately pricing.

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Conversely, it seems that more attention needs to be paid around the office, perhaps as a result of uncertainty about whether working from home will be “new normal.” However, it is unlikely that the overall requirements of the office will be relaxed, and we believe that opportunities still exist through alternative value in use. In towns and cities, multipurpose development, including housing, can be a productive and valuable application for outdated offices. Outside of major centers, there are increasing opportunities to relocate offices to other sectors where healthcare and life sciences are showing particularly strong space demand. This provides an opportunity to add value to previously unloved office locations, and these users are often destinations in their own right. The high cost of capital investment often means that long-term leasing is required, resulting in lower investor yields.

The shrinking high street retail is well documented, long-term valuations continue to decline as retail moves online, and warehouse value rises significantly, a trend further accelerated by pandemics. However, it is worth considering whether the decline in retail is too much down, offering opportunities, or even more pain in the future. Retailers that have survived the pandemic and sector shrinkage across the UK should work, but city center high-street assets that retailers no longer occupy provide an exciting alternative prospect. ..

  • Pooled Industrial Property Fund A-13.4% per year
  • Pooled Shopping Center Fund B-16.7% per year

In the market, these trends will be amplified in the future.

  • 57.5% share price premium for industrial real estate REITA-NAV
  • 56.2% stock discount on shopping center REIT B-NAV

We are looking at whether this is a unique anti-circular buying opportunity or if the value remains low. Successful stock if well-located city or town center retail and leisure assets with strong real estate fundamentals are available at significantly discounted prices, and in some cases cheaper than secondary industrial real estate It can provide an exciting opportunity for pickers.

In this market, investment decisions must be based on the specific benefits of the asset. Real estate fundamentals and the potential they offer, rather than being guided by sector weighting or relying on the performance of a particular sector, which is beyond our control and determined by broader market sentiment. You need to consider some unique opportunities. Ultimately, focusing on asset fundamentals and having opportunities for value-added activities such as refurbishment, re-leasing, and diversions should help drive fund performance.

Why focus on weighting a given sector when there are plenty of specific asset opportunities? Opportunities can be found in all sectors by identifying high-value properties per square foot for alternative use and high-yielding assets that may be re-leased. This approach may emphasize certain sectors more than others, but regardless of sector, the fundamentals of each asset are key to a successful investment.

Alex Short is a portfolio manager at AEW UKREIT.

Identify specific assets, not sectors Identify specific assets, not sectors

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