I hope real estate investors adjust to the rising rates environment appropriately with caution. Globally, higher rates will have an adverse impact on real estate valuations.
Outright asset owners, like ourselves, will be less exposed than those who have funded through borrowing. But this backdrop may not be a major concern for those looking to match long-term liabilities, increase diversification and/or benefit from the duration and illiquidity premia that complex, privately traded assets, like real estate, can offer.
Furthermore, investors will potentially be shielded from the impact of higher rates if the asset’s income is linked to a sector benefiting from an improving economy or if it is explicitly inflation-linked.
The growth of the digital economy is bringing new opportunities and threats. The challenges are particularly acute in the retail sector. Sales through stores will decline. Retailers will need fewer and smaller stores. Investors will need to position for a deteriorating outlook for secondary assets.
Over the next five years, we expect the values of the weakest assets to fall as much as 50%. By contrast, well-connected, prime shopping locations will be resilient.
Resolution: Last year, Aviva Investors created a real assets business bringing together significant debt and equity business in real estate and infrastructure. I will look into how we can better combine expertise and exploit the information advantages that come from running different components of the real asset universe as one truly integrated business.
David Skinner, managing director of real estate strategy and fund management at Aviva Investors Real Assets
2019 forecasts: what lies ahead
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2019 forecast: David Skinner (Aviva Investors)