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Getting Real: Alternative Asset Growth During Market Uncertainty

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OVERVIEW

Money has always had to work hard – and find different ways – to earn a return. This task is made even more difficult in times of economic uncertainty.

Global trade disputes, geopolitical developments and the threat of international trade wars are among factors leading to increased uncertainty in financial markets. These levels of uncertainty keep business leaders awake at night. In Aon’s 2019 Global Risk Management Survey, the C-suite, particularly CEOs and CFOs, selected economic slowdown and slow recovery as their top risk.

For institutional investors and those managing investment portfolios, using traditional stocks and bonds strategies to achieve investment objectives can be difficult in uncertain economic environments. As a result, investors are increasingly exploring investments in alternative asset classes. Prashant Tewari, partner at The Townsend Group, an Aon company, says: “The current levels of uncertainty are unprecedented, which can make investment decisions more complicated.”

Whether real estate, infrastructure, timber or even agriculture, alternative asset classes have emerged to provide some protection from an uncertain economic outlook. Alternative assets, such as real estate, can be attractive because they might correlate less with the economic cycle.


IN DEPTH

Bond and dividend yields have compressed in the current low interest rate environment. For example, yields on U.S. 10-year Treasury notes are less than half of what they were in the late 1990s. For those seeking higher yields and lower volatility, what opportunities could real estate investment provide?

The Real Estate Alternative

Real estate is uniquely positioned in this environment. According to Tewari, quality real estate can offer the potential for income generation and downside protection in an improving economy. He also claims that most investors see real estate as providing stable income.

In the U.S., for example, investors seek core assets in which income accounts for approximately 70 percent of returns. While opportunities exist, realistic return expectations are essential. Understanding specific trends within the real estate market itself is critical to making appropriate investment decisions.

Thirty years ago, there were four general property types available to investors: office, multifamily, industrial and retail. Fast forward to today, and investors are faced with various options and subsectors in which to invest – each with their own unique trends and investment themes.

From Shopping To Working: A Changing Mix Of Real Estate Opportunities

According to Townsend’s View of the World report, changing consumer behaviors and ways of working are transforming today’s real estate. While retail, apartments, office and industrial buildings remain viable investment targets, the rise of e-commerce and the so-called “Amazon effect” is making warehouses and distribution centers an increasingly attractive option for investors.

In June 2019, investment firm the Blackstone Group announced an $18.7 billion purchase of warehouse space from Singapore’s GLP Pte — the largest private real estate transaction on record, but it’s hardly the only one. Warehouses have become increasingly popular as e-retailers move toward same-day delivery. While the e-commerce network and adoption rate is more advanced in the U.S., Townsend’s report also notes the European opportunity: as e-commerce increases across the region, additional demand for warehouse space will follow.

Another emerging trend driving real estate decisions is worker preference for modern, collaborative workplaces. In the U.K., flexible office space providers have grown from occupying 3.9 percent of total U.K. office space in 2016 to 14.6 percent in 2018, according to a UBS white paper.

Tapping Alternatives To Meet Goals And Manage Uncertainty

While no one individual or business can control economic uncertainty, stock market volatility or interest rates, asset classes such as real estate can potentially deliver returns while managing risk.

Investors remain focused on the cyclical nature of real estate, especially because the previous downturn was so harsh on the commercial real estate market. It appears, however, that in this cycle the market has taken a more broad, tempered approach to investing in real estate, Tewari says.

As alternative asset classes have become increasingly available to institutional investment programs, more have sought these types of asset classes that can potentially provide strong returns, diversification and in the case of real estate, stable returns. “The risk-return trade-off in the real estate and real asset world can be very compelling,” says Tewari. “As consumer trends such as the ‘Amazon effect’ and coworking redefine how we think about space, real estate plays a key role – likely pushing these trends into the future.”

 

* Diversification does not ensure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.