Real estate activity revives, but full recovery elusive, IPD conference hears
Pockets of the real estate sector are reviving but there is still a long way to go to regain pre-crisis highs, according to asset experts at the latest annual IPD conference.
IPD’s annual event addressed the question of a “new paradigm” for the real estate sector, an acknowledgement that a full return to the heady days before the global financial crisis is unlikely. Opportunities for domestic and global investors are available, but extreme care and rigour are required to avoid remaining hazards.
Thierry Malleret, founder of the IPD Monthly Barometer, told the forum that the future of the real estate sector will be defined by four forces: Interdependence, complexity, velocity and transparency. The volatile combination of these factors will result in confusion, weak signals, asymmetry and a global governance vacuum.
He identified six global mega-trends set to change the economic landscape: Unfavourable demographics, Resource scarcity, Climate change, Geopolitical rebalancing, Indebtedness and fiscal issues and Rising inequalities. In the current market, risks and adverse shocks are contagious, he warned. Changes tend to happen dramatically, not gradually, and risks spread very fast, with small causes sometimes producing major effects.
Investors face the challenge of balancing risk appetite with a search for certainty. Most risks cannot be priced, but tail risks – the one-off, unknown events that can derail planning and projections – are increasingly relevant, he noted. Markets are being driven by sentiment and liquidity, rather than fundamentals, and very few investors have strong macro convictions.
The implications are that as in other sectors, there will be both fragmentation and polarisation, resulting in a “winner-takes-all” result. The cities and locations set to thrive are those which combine diversity and connectivity with a “holistic” security (physical, environmental etc.).
For investors able to sacrifice liquidity, the current environment offers great opportunities with respect to direct investment. Malleret calls for investors to be prudent, humble, aware of cognitive biases and imaginative. Success will depend on acting quickly and decisively, and “combining trust with discernment”, he said.
Roger Urwin, global head of investment content at Towers Watson, told the conference real estate is supported by a “reach for return” environment, but is “challenged by the opacity of its value proposition”. Its structures are improving, but many are “still clunky and poorly integrated with the mainstream investment world” and must respond to changing investment models and more demanding investment governance.