Recently, PIMCO (Pacific Investment Management), one of the largest global fixed-income managers, with 50 years of experience and roughly US$ 1.92 trillion in assets under management, identified 5 macroeconomic trends that will profoundly impact global markets over the coming years.
In this article we describe how these macro trends are likely to affect the U.S. private real estate market and the investment opportunities that arise in this historically atypical context.
Low interest rates
The first forecast is that interest rates should remain low for a long time on a global basis. This factor, first of all, reinforces for Brazilians the advantage of internationalizing part of their wealth. The interest rate paid by Tesouro Direto in Brazil, which ended September in negative territory for the first time in 18 years, no longer embeds a risk premium sufficient to compensate for so-called Brazil risk.
In the U.S., exceptionally low interest rates offer a rare opportunity to strongly leverage the returns on real estate investments, given that the average capitalization rate of commercial properties of 6.13% (average rental yield divided by the investment value) has exceeded the 10-year U.S. Treasury by 560 basis points, one of the widest spreads in history.
In other words, the reduction in interest rates has not yet resulted in an increase in property prices (as one would expect in a normal economy), so acquiring properties financed at extremely low interest rates tends to generate stronger cash flows in the short term, and asset appreciation when the economy normalizes.
Reduced globalization
After the experience of the pandemic, the interdependence between countries in global production chains became clear. In the near term, the bet is that local industries will be favored, strengthening regional economies and consequently the U.S. industrial real estate sector, which had been replaced by its Chinese counterparts due to lower cost. This factor should generate investment opportunities in asset classes such as industrials, warehouses and self-storage, in addition to job creation that indirectly affects retail and multifamily residential real estate returns.
Rising inflation
With the substitution of imports from China and the strong expansionary policies adopted by the U.S. in the wake of the pandemic, input prices are likely to rise, generating an increase in inflation that should be reflected in higher rents. This will have a positive impact on cash flow for investors, and consequently on property prices over the long term. Because real estate is a real asset, it tends to act as a hedge against inflation, protecting the investor's wealth.
Increased savings
Due to the low interest rates forecast for an extended period and lower financial returns on traditional investments, individuals are forced to reduce consumption, as returns are no longer sufficient to supplement their retirement income.
A reduction in consumption may negatively impact some sectors such as hotels and luxury retail, but the real estate market has certain essential, less consumption-sensitive sectors, as proven during the lockdown, such as spending on residential housing and food, which drives everything from distribution logistics properties to grocery-anchored retail.
Need for expansionary fiscal policies
Finally, to avoid a new economic depression, it will be necessary to adopt expansionary fiscal and monetary policies in the U.S. Countercyclical policies in times of recession tend to favor the residential real estate sector by prioritizing support for the population's most basic needs, among them housing.
In addition, these policies feed back into some of the trends described above, such as low interest rates and rising inflation.
Conclusion
The “flight to safety” of global investors toward the real estate sector is well documented, grounded in the fear that some of the factors described above, including the strongly expansionary policies adopted by most economies in the wake of the pandemic, will act to erode the real value of their assets over the long term.
The combination of low interest rates with a potential increase in inflation should benefit investment strategies backed by real assets that generate cash flow and act as a hedge against inflation. In addition, U.S. real estate currently benefits from a historically high spread between interest rates and rental yields, creating an opportunity to leverage the returns of this asset class that should disappear as soon as the market normalizes.
Ativore's U.S. investment thesis, based on building portfolios of stakes in private real estate funds, generating cash flow and diversified by asset class and region, showed strong resilience to the COVID-19 crisis, having acted to align our clients' investment portfolios in favor of global macroeconomic trends. To learn more about how our clients' consolidated portfolios behaved since 2013 and during the pandemic period (1st half of 2020), access our September article.
