Commercial real estate ventures win in 2020, says UBS

by Kimberly Greene21 Nov 2019

In an uncertain economic environment, commercial opportunities are the way to go, with investors seeking e-commerce and rental housing-oriented real estate, according to a recent report from UBS, “Year Ahead 2020”.

Both commercial and residential real estate prices have escalated due to years of low borrowing costs. The low interest rates have become the norm, not the exception, and that’s expected to continue for quite some time. These factors should play into the decisions that investors make in the years to come.

For commercial real estate, UBS advocates an active management strategy.

“Skilled managers can still unlock value, even in periods when overall returns are likely to be modest and transaction volumes are falling. Investors should choose investments based on long-term structural trends, such as the growth of e-commerce, urbanization, and aging societies,” the report reads. “For example, urban logistics real estate, like small warehouses and distribution centers that facilitate the last stages of the delivery process, stands to benefit from the rise of e-commerce, while secondary retail assets are coming under pressure and should be avoided.”

Even though people will continue to migrate to cities, a number of metropolises around the world are facing elevated risks in the owner-occupied housing market. For investors looking abroad, UBS highlights Paris, Munich, and Vancouver in particular as cities with a heightened danger of price declines.

Benjamin Tal, deputy chief economist of CIBC World Markets mentioned rental housing-oriented real estate in a recent address at the recent Mortgage Professionals Canada conference in Toronto. He proclaimed housing rentals to be the wave of the future.

“The rental market, I believe, is the future of real estate over the next 10 years. I think that you will see more and more young families renting, and you will see situations where you are 35  years old, you are married, you have kids, and you are renting; nothing is wrong with you. I think that will be the new mentality in the market.”

This need will be filled largely by purpose-built rentals, he said. Still, there’s plenty of space to explore residential property investments.

Whether property investors are looking at home or abroad, having a diversified portfolio is still solid advice, even more so now than ever.

“Regulatory interventions to improve affordability have become a growing issue. However, pockets of relative value remain, including in Chicago, Milan, and Dubai. Residential investors should therefore choose their locations carefully. A diversified property portfolio in such fairly valued or undervalued cities would improve the potential for an attractive risk-adjusted rate of return over coming years,” the report reads.

Environmental considerations are also going to have a growing impact on policy, and consumer demand is projected to increase for sustainable products, services, and materials. But UBS warns that any environmental actions and solutions may not be enough to prevent further environmental problems from occurring, and investors can’t ignore environmental factors.

“Investors will need to carefully consider environmental risks in their decision-making. Such considerations are particularly relevant when investing in long-term physical assets like real estate, utilities, and infrastructure.”