Real Estate

The most socially connected real estate subsectors – such as offices, retail, hotels, and entertainment venues – were quickly and adversely affected by government measures to contain the pandemic. On the other hand, logistics and data centre assets continued to thrive, as many of the factors fuelling their growth over recent years became key components to how governments, businesses and individuals responded to the pandemic.

Signs of an early rebound for some of the hardest hit sub-sectors dissipated by mid-year as travel and social distancing restrictions remained in place. Government support programmes, aggressive monetary policies, and reasonably healthy corporate balance sheets were successful in avoiding large-scale business insolvencies and job losses. However, banks witnessed a rise in troubled real estate loans and, fearing higher delinquencies, tightened lending standards. In several sectors, rent collections remained healthy, although higher tenant incentives and leasing concessions were common.

Against this backdrop, ADIA’s Real Estate Division remained focused on the long-term themes it has followed in recent years by optimising allocations to sectors, geographies and modes of access to capture future growth trends.

The Division has built exposure to sub-sectors set to benefit from technological disruption, particularly logistics, data centres and life sciences, and to prominent technology hubs such as Silicon Valley, Shanghai, London and Paris. This ensured the portfolio remained well positioned during 2020.

The Division continued to build on its platforms in China and India, targeting cash flows from the growth of the middle class. In China, the partnership with Prologis expanded the Division’s network of modern logistics units while, in India, the investment with major mortgage lender HDFC continued to build affordable and mid-market for sale residential projects around the country.

The Division retained its focus on the residential sector globally which, after initial declines in Western markets in the first quarter, continued to improve steadily during the year on the back of low supply and historically low mortgage rates.

Looking ahead to 2021, the easing of pandemic related economic hardship and social restrictions should be supportive for global office markets, while capital markets are likely to benefit from improving investor sentiment. The recession of 2020 has created a meaningful economic output gap that is expected to be filled, further supporting real estate market fundamentals.

While it is too early to fully assess the long-term impact of the rapid shifts in consumer behaviour caused by the pandemic, the risk of asset obsolescence has significantly increased for real estate investors. Early signs suggest that accelerated moves to more remote working and online shopping, along with less international travel, represent permanent changes, although by what degree is still hard to determine. The real estate sector will need to adjust accordingly, particularly through developing more flexible, multi-use spaces and by meeting rising tenant expectations around amenities and health and safety.

For the industrial and logistics markets, wider adoption of e-commerce (in terms of the range of products offered and the consumer age group), nearshoring and last-mile supply chain management have continued to drive the sector’s growth. Digital infrastructure is now more important than ever before, fuelling further increases in demand for data centre capacity.

The hospitality industry was among the hardest hit by the pandemic. In Asia Pacific, hotels experienced a rebound in demand in the final quarter of 2020, but overall the sector remains under stress, particularly in Europe and the United States. ADIA’s Real Estate Division believes tactical investment opportunities are likely to emerge over the coming year and beyond.

In 2021, the Division will maintain its disciplined investment approach. This will include an ongoing focus on platform investments in areas backed by positive structural trends, and investments associated with knowledge-clusters as highly skilled workers are drawn to supply-constrained locations.

ADIA’s Real Estate Division will continue to build its capabilities in data analytics to analyse both structured and unstructured data in support of strategic allocation decision making.

This data-centric approach will also be applied for the identification and evaluation of physical and transitional climate change risks, both in the management of the Division’s existing portfolio and for new acquisitions. The Division continues to refine its data set on asset-level sustainability accreditation and relevant benchmarking. The Division has also embedded a process to evaluate climate change impacts for all new investment proposals. This has included work to identify the most appropriate methodology for obtaining standardised asset level information, through in-house research and discussions with partners, peers and specialist climate change forecast firms. The Division will continue to refine its approach by introducing new assessment tools for both prospective and existing investments that provide a more consistent level of climate change-related data.