For real estate investors, 2019 may be a year of adjusting to rapid changes arising from a variety of sources, including environmental, social and governance-related (ESG) risks; geopolitical uncertainty; and disruptive technology. In this blog post, we discuss the five emerging real estate trends we view as most likely to impact our clients’ investment decisions over the next 12 months.
- ESG risks on today’s investment horizon
Real estate investors are increasingly integrating ESG considerations into their portfolio decisions as climate change has a direct impact on the ownership and management of property — and vice versa. This trend isn’t likely to decelerate in 2019. The U.S. government’s Fourth National Climate Assessment report, issued in November 2018, directly links recent extreme weather events to changes in the climate and estimates that climate change may have an economic impact twice as large as that of the Great Recession.1 Property in some places may experience the effects sooner than in others. For example, in the coming years, the value of real estate in coastal zones with high risk of flooding may lag or decrease relative to property values in less flood-prone inland areas, according to an estimate in MSCI’s “ESG Trends to Watch in 2019” report.2
- Few places left to hide from geopolitical risk
Although real estate investors have historically focused on their domestic markets, investors are continuing their gradual shift away from this home bias.3 Many real estate investors who have diversified globally are encountering geopolitical risk, however: 2018 was a year of political discord in both developed and emerging markets, with continued uncertainty in the U.K. arising from the Brexit referendum, the nationwide protest movement in France, the longest government shutdown in U.S. history and ongoing U.S.-China trade tensions. The increasingly international nature of real estate capital markets means that investors may not be able to escape these global risks. Global Gateway Cities are particularly exposed to such capital flows.4 In this context, we anticipate that political uncertainty will likely remain a top risk for real estate investors in 2019.
- Technology-driven disruption
Technology’s ongoing impact on the real estate industry shows no signs of deceleration. The disruption is fundamentally changing the role real estate plays within tenants’ business models and hence the amount and nature of the space they seek to occupy. In the past, real estate was an unquestionable factor of production. Retailers could only really access customers through shops, and communications technology limited the potential of flexible working conditions. Technology continues to change all this. We estimate that tenants’ business models — and what they mean for how much and what type of real estate they demand, the additional services they may require and the contractual arrangements that will govern these evolving relationships — will have important implications for the shape of real estate cash flows and hence the role real estate plays in a portfolio, as well as the way real estate investments are underwritten. In short, it’s a brave new world.
- Real estate investing in the age of transparency
The revolution in index-based and factor investing in equity markets, which has been driven by market transparency and sophisticated analytics, has increased efficiency for investors but also led to the erosion of alpha opportunities. As a result, capital has gradually shifted to private asset classes such as real estate, which are protected by relative opacity and where market inefficiencies still exist.5 We think this trend is likely to continue into 2019. Real estate now has more weight and significance within portfolios — but is also attracting more scrutiny, as investors expect transparency and insight into this less liquid and previously opaque asset class.
- Endurance of cycles
More than 10 years into the current expansionary cycle, many investors believe recent strong performance will not continue at the same pace. At the same time, there is ample capital in the market, as demonstrated by the creation of the largest-ever real estate fund, by Blackstone in January.6 Investors are asking themselves how they should position their portfolios. Some may take defensive positions to hedge against a potential downturn, searching for properties less correlated to market movements and offering more secure income. Others may fill the growth gap left by slowing yield compression, seeking properties with more potential growth in cash flow. Regardless of approach, digging deeper into the data — for example, by using asset-level historical data to understand how specific combinations of risk factors have performed throughout different market conditions — may help investors better understand how portfolios have performed during various markets.
1U.S. Global Change Research Program. (2018). “Fourth National Climate Assessment.”
2Lee, L.-E. and M. Moscardi (2019). “ESG Trends to Watch in 2019.” MSCI Research Insight.
3Aussant, J.M., P. Hobbs, Y. Liu and P. Shepard (2014). “The Erosion of the Real Estate Home Bias.” MSCI Research Insight.
4Nihalani, A. (2018). “Global Gateway Cities: The Performance Behind the Hype.” MSCI Research Insight.
5Willis Towers Watson. (2018). “Global Pension Assets Survey — 2018.”
6“Blackstone raises $20bn for largest-ever property fund.” Financial News. Jan. 17, 2019.
MSCI real estate research snapshot