Volatility and uncertainty impact real estate investment

Global Market Perspective, May 2020

Against the backdrop of broader market volatility and uncertainty, direct investment in global commercial real estate dropped by 5% year-on-year in the first quarter, falling to US$200 billion. Performance varied across the regions, with capital flows generally tracking the evolution of the pandemic. Defensive sectors are coming to the fore. As investors increasingly look to income stability, operation criticality and occupation density as key arbiters to asset-level risk, sectors such as industrial and multifamily are expected to benefit.

Despite ample liquidity in debt markets, lenders remain in a phase of ‘price discovery’ and are focused on asset managing their existing portfolios. This has led to a greater scrutiny over leverage, and an emphasis on experienced sponsors, resilient sectors and strong locations in quoting new deals.

Fundraising by private closed-end real estate funds fell to its lowest Q1 level since 2013 with US$22.3 billion raised through the first three months of the year. Investors continue to consolidate investments with the most experienced managers, with nearly 38% of Q1 capital raised globally by five funds. Investors are now seeking opportunities to emerge from the dislocation caused by the pandemic.

As we look ahead, with the near-record volume of dry powder held by investors, global commercial real estate is still poised to see healthy investment over the medium to long term. However, the repercussions of the pandemic will be realized in the short term and will result in a drop-off in capital flows in the sector.