This week, The Economist highlighted the role which commercial real estate plays in the portfolio of institutional investors seeking an alternative to low-yield bonds. It highlights that being selective focus and transparency on properties and tenants is the key driver of determining which properties to invest in.
“The infatuation with commercial property began in earnest after the global financial crisis of 2007-09. Interest rates were cut to almost zero across much of the rich world, making it harder to generate the safe cash flows that pension funds and insurers need to meet future liabilities. “Core” property—often in desirable places and needing little refurbishment—typically produced secure annual returns in the high single digits to low teens, mostly in the form of contractual, often inflation-adjusted, rent payments. Buying property allows investors to park vast sums of money—from tens of millions to billions of dollars—which they can forget about for years (commercial leases often last a decade or more). And the returns have been less volatile in crises than those from public equities and commodities.
As a result both the numbers of institutional investors buying up property and the amounts they have allocated to it have risen since 2010. A chunk is channelled through private property funds, which have raised $1.6trn since 2008, according to Private Equity Real Estate, a publication. All together, institutions hold about $6trn worth of assets privately, and $5trn through listed vehicles. Property is typically financed by helpings of debt, which accounts for just under half of the market’s value in America.” – The Economist