At Generali Real Estate we believe that quality in a crisis should offer lower volatility, helping portfolios to readjust more quickly to positive rebounds: quality in real estate can be characterized by location and features. We have identified four major opportunities for 2023:
High quality offices in gateway cities prove resilient
Logistics benefit from strong e-commerce and supply chain re-shoring demand
Commercial real estate debt offers optionality and appealing returns
Sustainability as a main investment selection criterion across all real estate asset classes
1 - High quality offices in gateway cities prove resilient
Major European cities are continuing to grow in terms of demographics and attracting talent, especially younger generations. This creates a favorable environment for an active demand by tenants that – through the lease a building – are able to provide cash flows to investors.
Specifically on the office sector, high quality tenants are pursuing well-connected buildings (i.e. city centers or semi-central locations properly served by public transportation network) with high real estate quality (i.e. focus on wellbeing, amenities, meeting rooms and collaborative areas) to foster a positive environment that allows tenants to generate and sustain a company culture attracting the best talent. A prime building with a strong tenant is well-positioned to act as solid inflation hedge: in terms of income, a blue chip tenant can cope with inflation and from a real estate point of view the asset’s value can consequently increase. ESG is also key for tenants, managers and landlords, from reduced energy consumption to improved wellbeing.
2 - Logistics benefit from strong e-commerce and supply chain re-shoring demand
Logistics can now be considered as an established asset class where structural factors such as e-commerce growth and the re-shoring of supply chains can drive demand for tenants and investors.
Online sales will not be the only way people will buy goods, but we can be confident that the market will continue to grow in coming years. Since e-commerce retailers cannot have the physical stores that can act as storage, they need three times more the space of ‘bricks & mortar’ retail and therefore a margin growth of e-commerce represents an exponential growth for warehouse space.
As war in Ukraine and geopolitical tensions are showing every day, there is a strong need to shorten supply chains (“re-shoring” or “near-shoring”) and to increase inventories (switching from ”just in time” to “just in case”) to ensure stable delivery of goods and products. That means even more goods have to be stocked in warehouses, creating more demand.
3 - Commercial real estate debt offers optionality and appealing returns
In the light of an expected downturn in 2023, the banking sector is becoming more risk adverse and reluctant to loan money to complex real estate projects. In contrast, alternative lenders are well-equipped to properly assess risk and provide financing on a selective basis.
It is worth mentioning that senior real estate loans are uniquely positioned to navigate uncertainty: i) with floating rates, it is possible to hedge interest rate hikes, and ii) having a loan to value around 60% they can absorb a potential sever market correction without affecting the loan itself.
4 - Sustainability as a main investment selection criterion across all real estate asset classes
The role of ESG screening across the real estate value chain – from an investment due diligence process to the day-by-day tenant management and relationship – has grown from ‘nice-to-have’ element to an integral part of the risk analysis and a key component for value protection in the long term. Real estate investors show a growing appetite for ESG-labeled investments, both in terms of increased demand for products with robust ESG screening methodologies, and in terms of strong ESG evidence for the underlying assets and funds.
Growing regulatory demand (EU taxonomy, SFDR, Fit for 55, …) create a harmonized framework and ‘raise the bar’ for real estate players. The more responsible ones are already well ahead in pursuing their ESG commitments, for example as part of the UN’s convened Net-Zero Asset Owner Alliance.
*Please note this is the opinion of Generali Real Estate SGR S.p.A. (“Generali Real Estate”) as at December 2022 and it may evolve over time, without prior notice.
