Author Details

Niel Harmse

Niel Harmse
Vice President, MSCI Research

Will Robson

Will Robson
Executive Director & Head of Real Estate Solutions Research

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What Drove 2021 Real Estate Returns?

  • Industrial properties’ returns were strong in 2021. But within industrial, individual-asset performance was highly varied and widened the dispersion of returns.
  • “Distribution slicing” can help investors understand what drove the increased performance diversity across and within property types.
  • The strongest-performing U.S. industrial properties’ returns were mainly driven by exceptional yield compression.

As 2021 real estate index returns roll in, we’ve seen a broad-based acceleration of returns across nearly all countries and property types. But what can looking beyond the aggregate index returns tell us about the difference between the winners and losers? In examining the return data, we clearly see that investors benefited by not only making the right sector calls, but selecting the best-performing assets within sectors.

 

Returns increased in level and diversity

Despite the strong year in aggregate, there remained significant disparity in the levels of sector returns. For instance, industrial continued to outperform retail and office in many markets — driven in part by acceleration of returns across the whole industrial sector. But even within industrial, the return dispersion of individual assets widened in 2021, particularly in the U.S. and Canada.

The heatmaps below illustrate the difference between total returns in 2021 and 2020, by country and property type. They also show the change in the interquartile range of individual-asset returns within each property type and country. Industrial outperformed in most countries and accelerated since 2020. And even though retail properties lagged significantly in 2021, they too accelerated from a weak 2020. While retail’s performance acceleration was accompanied by a tightening of return distributions within the sector, industrial’s acceleration commonly coincided with a widening return dispersion among individual industrial assets. This phenomenon was particularly strong for industrial property in the U.S.

 

Hotspots of increased returns and dispersion

Source: MSCI Real Estate; KTI. Data as of December 2021. Country-level data represented in the heatmap is based on the individual MSCI Annual Property Indexes, except for France and Ireland, where we reference the MSCI France Bi-Annual Property Index and the MSCI/SCSI Ireland Quarterly Property Indexes. The analysis includes results for Finland, for which MSCI is not the index administrator but for which it receives asset-level information from KTI, an independent research organisation.

 

Focusing on the U.S., the exhibit below illustrates how the distribution of individual asset returns in the MSCI US Quarterly Property Index shifted to the right and widened considerably between 2020 and 2021. The right-hand panel illustrates how this trend varied across property types, with industrial noteworthy for the extent it widened and shifted rightward. In the bottom panel, we slice the 2021 all-property performance distribution into 10 equally sized groups (measured by number of assets). Slice 10 represents the worst-performing 10%, and slice 1 the best-performing 10%, of assets. By slicing the distribution in this way, we clearly see that property type had a significant impact on relative performance, with office and retail significantly occupying the laggard (left) end of the distribution and industrial occupying the top-performing (right) end, to such an extent that slice 1 consists almost entirely of industrial assets.

 

Industrial assets dominated the US performance distribution

Distribution of Total Return: MSCI US Quarterly Property Index

 

The rising US industrial tide didn’t float all boats to the same extent

The strength and diversity of U.S. industrial returns lead to more questions about what drove the differences between the best- and worst-performing assets. The charts below show the application of distribution slicing specifically to U.S. industrial assets, to examine how the return characteristics varied across industrial assets from the worst- to best-performing deciles.

 

Drivers of return varied considerably across US industrial properties

 

The top performers stood out in more than one way

In the exhibit above, the chart on the upper left illustrates how geographic exposure varied across the performance distribution. The four best-performing slices of the distribution show significant exposure to the U.S. Pacific and Northeast regions. The upper-right chart shows how substantial yield compression drove the majority of the better-performing assets’ capital growth: The best-performing 10% of assets experienced capital growth of around 80%, on average.

In the lower-left chart, we can see the yield shift that drove this contribution to capital growth. All slices of the distribution had positive yield impact driven by yields shifting downward, indicated by the green floating bars. The better-performing assets saw a greater downward shift in yields, but from similar or even lower starting yields than the rest of the distribution. This implies those assets were already relatively low-yielding and were bid down further throughout the year. One may have expected the strong yield compression to be the result of capital flowing to higher-yielding, lower-priced sections of the market, but that seems not to have been the case.

The chart on the lower right shows the shift in vacancy rates across the distribution slices. Vacancy rates fell across nearly the whole distribution, except for the worst-performing 10% of assets. Even here vacancy rates rose only marginally and were still relatively low, at 5%, at the end of the year. Interestingly, December 2021 vacancy rates declined as you move up the performance distribution until the top two slices. The higher vacancy rates among these top performers may reflect investors’ willingness to buy into some of the lower levels of leasing risk that exists in U.S. industrial markets, with the potential for significant rental reversion.

 

Distribution slicing helped identify winning and losing asset characteristics

In sum, we saw significant diversity of performance across individual real estate assets in 2021. Segmenting real estate assets by performance may allow investors to understand how the nature of assets and the drivers of their returns have varied across a performance distribution. This distribution slicing may help investors combine top-down, strategic analysis of property types and geographic trends with bottom-up asset-level insights.

 

 

Further Reading

COVID-19 and Real Estate: The Devil Is in the Dispersion

Real Estate Asset Selection Mattered — Especially in a Crisis

Could Factors Help Explain Asset-Level Real Estate Performance?