Strategies for the stress test

The coronavirus pandemic is testing the stability of open-ended real estate funds again. But while most asset classes have experienced a severe slump and then a strong recovery over recent months, open-ended real estate funds have delivered relatively stable performance. Average volatility has been under one percent. So on the one hand they passed the stress test, but open-ended real estate funds have not completely escaped the impact of the pandemic.

What does it take to pass the coronavirus stress test successfully and secure a strong position in the post-pandemic world? All disciplines have a part to play, backed by effective teamwork. Firstly, in tough economic times active asset management is particularly important. Acquiring and retaining tenants is essential for maintaining the competitive profitability of our fund products. In addition, investment in existing properties – refurbishment and restructuring – ensures that buildings and user structures are well placed in terms of future viability. 

At the same time, the foundations for the post-pandemic world are being laid in the investment market. Investors are currently particularly interested in offices, logistics, retail parks and local daily-needs providers as well as housing in European metropolitan regions, because these property types are expected to continue performing strongly. Mixed-use city centre ensembles are also in demand. Above all, however, residential property is experiencing a boom because it is seen as a stabiliser in portfolios. Residential has a low correlation to cyclical developments in the commercial real estate market, delivers stable cash flows and offers good long-term performance prospects. True to the saying that “people always need a place to live”, housing is much more resistant to negative external impacts, such as economic crises.

In the quest for stability, highquality, well let core properties in good or very good locations are proving popular in the current climate. Given the increasing shortage of such properties, collaboration between asset management and investment management teams is becoming more and more important. “Manage to core” is a strategy involving the acquisition of properties that offer value-add potential, with this being leveraged through updating and repositioning. 

“Manage to green” is also growing in importance because sustainable buildings are very high on investors’ wish lists. There is mounting pressure to reduce the carbon footprint of existing stock. The most recent report published by the Intergovern- mental Panel on Climate Change (IPCC) again stresses this need. In order to achieve ambitious climate targets, it is likely that local legislation, ordinances and building regulations will be tightened further in the coming years. 

One thing is certain: the more flexible, modern and sustainable a space is, the better. Properties in prime locations remain in demand in tough times – and the office market is no exception. Even though the number of people working from home increased significantly during the coronavirus pandemic, centrally located office space will remain sought after. Hybrid workplace models are set to become more widespread, but a strong office component will be retained as essential space for creativity, interaction and socialising. Few if any companies will be willing or able to do without such an option.

Title image: Martin Barraud

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