Opportune timing

Unlisted real estate sits between bonds and equities in terms of its risk-return characteristics. Historically it has offered higher returns than bonds, but lower risk than equities and listed real estate. Real estate also has a low correlation with bonds, while at the same time delivering higher returns with only slightly higher volatility. As such, it is often used as a portfolio diversifier. The favorable risk-adjusted performance is the result of the high proportion of the total return which is derived from the contractual rents paid by tenants, the income return. Over the long-term core real estate, the lowest risk profile form of real estate investment, is expected to deliver the majority of its total return from income (70-80%), with the remainder coming from capital growth. Real estate is holding up relatively well, with 2022 witnessing the second highest global deal volume (USD 1,135)^[1], and we see both short and long-term benefits for those who explore this asset class.

The current re-pricing, distressed investment opportunities, and fresh equity providing a considerable negotiating power all add to the short-term benefits. We think now is an opportune timing to consider investments for several reasons. Firstly, the recent adjustments in prices due to higher interest rates have created an attractive entry point. Such opportunities arise only once in a cycle, making it a unique chance to capitalize on favorable market conditions. Secondly, investing in quality real estate with a promising outlook, especially when its value has adapted to the prevailing higher discount rate environment, can yield significant future returns. Therefore, taking advantage of this opportune time to invest in real estate is likely to prove highly advantageous, as it aligns with the potential for growth and improved returns in the future. It is also important to note that real estate is a less liquid asset class compared to the daily traded public markets in equities and investors need to take this into consideration. In downturns it may not be possible to sell real estate investments, or only at a significant discount. As such, real estate investors typically have long term investment horizons and do not require the high levels of liquidity provided by public markets.

^[1] McKinsey Global Private Markets Review 2023, McKinsey & Company, March 2023