This month, Bank of America’s fund manager survey found global allocations to real estate investment trusts are at their lowest level since 2008, despite a marked improvement in sentiment on the outlook for the economy. Have investors lost faith in Theodore Roosevelt’s assertion that “real estate is the basis of wealth”? Where does property fit in multi-asset portfolios?
With UK interest rates at their highest level in 15 years, the headlines certainly paint a bleak picture of the property market. House prices were down 2.4% in July compared with a year earlier – the fourth consecutive month of declines. The latest RICS survey suggests the weakest outlook for the market since 2009, with price expectations negative over both three- and 12-month horizons.
In commercial property too, the mood is pessimistic. Financing conditions are the toughest since at least 2014, according to RICS, and two-thirds of surveyors say the market is in a downturn.
See also: Is there still life in commercial property?
Investor confidence has also been dented by three rounds of fund gating for UK commercial property funds in the past six years – after the Brexit vote, in the early days of the pandemic, and again last year after September’s mini-budget provoked a wave of redemptions. New FCA rules on notice periods for open-ended property funds are still awaited following the consultation on addressing the liquidity mismatch with underlying assets in 2021.
Sector survey
In many parts of the property market, higher interest rates are only exacerbating pre-existing challenges. The office sector is under continued pressure from the move to hybrid working that resulted from the pandemic. While some large global employers have been in the headlines for insisting on a return to face-to-face working, many businesses have held on to hybrid models, taking advantage of both smaller cost bases and the improved ability to attract and retain staff in a challenging hiring environment.
See also: Ben Goss: Risk is in the eye of the beholder
Even before Covid, this trend had long been forecast, given the ability of technology to bring together teams in different physical locations. But the pandemic accelerated both the development of that technology and its adoption, resulting in a structural shift that looks unlikely to be reversed.
To read more, visit the September edition of Portfolio Adviser Magazine
