The Covid 19 pandemic has resulted in significant disruption across every major industry in the global economy. The real estate segment has been one of the most impacted segments due to the pandemic. Conventionally known as a stable market segment driven by local demographics, the real estate segment has been amongst the fastest-growing segments amidst the pandemic. Despite the transition observed in real estate markets, the industry segment offers a viable diversification tool to portfolio managers that are looking to add value to their portfolios. The current directive of the industry indicates continued positive growth in the industry segment based on evaluated trends.
Before we explore the future outlook for the real estate segment, let’s explore the performance of the industry in 2021.
Recap of Real Estate Industry in 2021
The global real estate segment outperformed conventional trends in 2021, delivering over 27% growth for the year. Measured as an aggregate of global performance by DIF insights, the growth of the segment was measured by a wide range of internal and external factors, including reopening economies and fiscal stimulus by central authorities around the globe.
Here are some key insights from the year.
- North America led the growth of the segment with rapid growth observed in the self-storage in the country. The segment exhibited a growth of 79.4%, followed by the industrial segment with a growth of 62.6%. Other key segments in the region also outperformed the index with aggressive growth.
- Asian real estate markets lagged behind the index due to the policy structure adopted in key markets like China. The policy crackdown by the central government had a significant negative impact in slowing down the regional development of the property market.
- The European real estate market suffered from the zero-Covid policy stance adopted by key states. The reopening lag impacted the growth of the market and curtailed complete recovery.
- The spread of the Omicron variant in the second half of the year emerged as a significant negative factor in regions previously forecasted to reopen economies. The spread of the variant emerged as a key factor in slowing down real estate development in major developing economies.
Macro Sights in the Real Estate Sector in 2022
Evaluation by the DIF team suggests strong development in the real estate segment and related securities with increased cashflow expansion and dividend generation. The development of the Gross Development Product (GDP) of leading economies is expected to positively impact the development of the sector with strong credit availability across the sector.
Here are some key macro factors that contribute to our strong forecast for the real estate segment in 2022.
High Global Inflation
Inflation is expected to sustain above trends level in 2022, backed by the existing landscape in the supply chain structures worldwide. The spread of the Omicron variant is expected to be another factor in sustaining high global inflation.
Historic evaluation of Real Estate Investment Trusts (REITs) performance in high inflation periods suggests positive returns. This is because of the strong correlation between higher inflation and economic growth. Real estate has typically been considered a major inflation hedging sector by investors. Increasing global prices will have a positive impact on pricing valuations globally.
Expected Income Increase for Workers
The rebounding global economy will maintain the labor shortage landscape in developed economies. The resulting shortages will continue to impact wage increases in key industry segments worldwide. However, investors and fund managers need to consider increasing labor costs as part of their strategies as well. The existing labor shortages are expected to lead to improved income for workers as a result of high demand.
Key Trends for REITS in 2022
Positive economic development correlates with development in the real estate segment. Even though typical forecasts have followed the established patterns, the existing landscape is more nuanced as a result of the inter-related factors at play.
Impact of Covid-Learned Behavior on Offices
The Covid 19 pandemic has significantly impacted worker behavior around the world. Remote work has become the new normal thanks to the progress made by companies in implementing advanced technology. Demand has transformed from retail-centric operations to data centers and digital storage facilities. Flexible working arrangements have completely transformed the working requirements for office spaces.
The remote work transformation will continue to have a negative impact on office properties and spaces around the world. Even though the extent of the impact will vary based on local demographics, evaluation of leading office properties in metropolitan cities points to decreased occupancy.
Business travel is expected to recover, but DIF anticipates that the recovery will be below pre-pandemic levels. As organizations come to terms with the cost-benefit proposition of virtual environments, notable transformations are expected to sustain in the industry segment.
Proptech Shift in the Industry
Technology has emerged as a key difference-maker in the real estate industry. The role of technology has shifted the primary real estate market from retail centers and outlets to data centers and technological locations. This is paving the way to new winners and losers in the real estate segment.
Property owners are embracing the prop-tech niche to enhance general experiences from marketing to business management. Across residential and commercial properties, features like online leasing, smart security management, and virtual tours are becoming integral features. Investors in the real estate segment have to adapt to changing technology dynamics to cater to consumer requirements in the industry.
This year offers positive prospects for investors in the real estate sector thanks to anticipated GDP growth and attractive valuations in the real estate segment. The fundamental recovery of the sector is also another key factor in enhancing returns for REITs and global investors.
DIF experts recommend investors explore real estate locations based on policy situations to ensure optimal returns and minimize portfolio risks. Overall, we expect positive opportunities across developing economies with broader economic reopening in the second half of 2022.