After a period in the wilderness, there have been improving signs for commercial property, as interest rates fall and deal activity revives. The sector is also plugged into a number of key trends in the global economy, including artificial intelligence and demographic change. However, there are still pockets of weakness, and concerns over the ‘stranded assets’ problem. Jason Yablon, head of listed real estate at Cohen & Steers explains how he is navigating a shifting environment.
Commercial property has been in a tight spot for the past two years. It was hit hard by rising interest rates, plus concerns over specific sectors, particularly the office market. The MSCI World Reits index lost 27.8% in 2022 and only recovered slightly in 2023 – rising 6.9% against 21.8% for the broader MSCI World. Nevertheless, there have been tentative signs of growth this year, with the index up 29.3%.
Valuations are improving. In November, UK commercial property giant Land Securities said the value of its portfolio rose for the first time since 2022 in the six months to 30 September, with its retail properties and prime London office buildings seeing a recovery. London office specialist GPE also recorded higher valuations.
European commercial real estate valuations seem to have stabilised, with interest rates falling faster than elsewhere.
There have also been some big deals, which suggests growing confidence in the market. Private equity group Starwood announced a £673.5m acquisition of the Balanced Commercial Property Trust in September, while listed warehouse group Segro bought Tritax EuroBox’s assets for £553m in the same month. There has also been significant consolidation among real estate investment trusts (Reits).
This is the complex backdrop facing Yablon. He was promoted to head of listed real estate at specialist Cohen & Steers on 1 January, having previously been head of US real estate at the group.
Fundamentals first
Yablon’s approach is to look at the fundamentals, and find Reits that are undervalued based on those metrics. He says: “We want to deliver better risk-adjusted returns than private real estate to the end-investor, and do it in a way that has full daily liquidity.
“Cohen & Steers aims to take a different view on the future supply and demand of commercial real estate for different property types in different markets. With that analysis, we look at potential occupancy and rental growth, and then we own what we think is cheap based on that analysis.
“When we take a more positive view of rental growth in a particular building, property type or market, it will translate into us having a higher valuation for those companies’ assets, and therefore for that company as a whole. And then in our model, it will look cheap.”
Read the rest of this article in the December issue of Portfolio Adviser magazine