Part 1 of this year’s MSCI Real Estate Research Snapshot is a compilation of our research published through the first half of 2020. At the start of the year we suggested that 2020 may prove to be a watershed year in terms of the way investors consider real estate as an asset class. On the face of it, it seems that due to the ongoing COVID-19 pandemic we may have been right, albeit for entirely different reasons.
No one could have predicted just how disruptive and broad-based the impact of the COVID-19 pandemic was going to be. However, the ensuing crisis does highlight how real estate is inextricably linked to other financial markets, the broader economy and society around it. These links are at the heart of the emerging trends we identified for 2020.
Global Head of Real Estate Solutions Research, MSCI
2020 content tabs
As a long-term asset class with fixed asset locations, private real estate may be especially vulnerable to both physical and transition risks from climate change. Real estate portfolios may be exposed to a variety of physical risks that could impact values. Our analysis found that different potential risks may require different mitigation strategies.
Investors often think of their real estate exposure in terms of property type and geography, but there are many other potential factors that may help explain performance.
Longer investment horizons and a reliance on appraisals may mean that private real estate does not react to shocks as rapidly as public markets. However, this does not mean the asset class is immune to those shocks. We used MSCI’s Valuation Scenario Model to show how discounted-cash-flow models could be used to explore the impact the crisis could have on asset values.
What out-of-cycle write-downs may mean for real estate yields
In real estate investing, capital growth has historically been more volatile and less predictable than income return and has therefore been responsible for most of the observed variability in total returns. Decomposing relative capital growth provided additional context that helped shed light on what has driven relative performance, and how much could be attributed to variables like yield compression and income growth.