INVESTMENTS

Real Estate

Real estate investors shifted their focus in 2021, from managing the impact of the COVID-19 pandemic to the opportunities arising from the market’s broad-based recovery.

Global real estate rebounded sharply, led by the U.S. real estate market which posted its highest returns since 2005. ADIA’s Real Estate Division was well-positioned to take advantage of improving market conditions, deploying capital into high-conviction themes across both public and private markets.

Across the asset class, the central theme of 2021 for investors was ‘flexibility’. As hybrid working models became more embedded, a top priority for many was predicting how space needs would be influenced by changes to the way people work, shop and live.

Fundamental and structural forces that have emerged in recent years continued to reshape the real estate landscape, with technology disruption creating tailwinds for logistics, data centres and technology hubs. Meanwhile, climate change and carbon neutrality are accelerating functional obsolescence, fuelling demand for new economy offices with superior environmental credentials. The attractive return profiles of some previously niche property sectors have brought them into the mainstream with wider acceptance by institutional investors. Meanwhile, banks have responded to tighter regulations by retreating from high loan-to-value lending, particularly in commercial real estate projects, creating investment opportunities for alternative financing.

Against this backdrop, ADIA’s Real Estate Division (RED) continued to benefit from evolving market trends. Activity levels were elevated throughout 2021, as the Division seized on secular opportunities and recovery plays induced by the pandemic. Examples included the further scaling of already sizeable investments in assets benefiting from digitalisation through the Division’s logistics platforms in China, Australia and Japan. RED also expanded its activities in data centres across Asia Pacific, unveiled plans to develop a rental housing portfolio of substantial scale in the UK, established new platforms and upsized its existing investments in offices with tailwinds such as laboratories and technology hubs.

The Division remains agnostic to how it accesses real estate opportunities that align with its high-conviction strategies. This in-built flexibility enabled it to exploit dislocations between public, private, and real estate debt markets that emerged in periods of market volatility during 2021. For example, it was able to capitalise on the illiquidity and bespoke nature of private credit to capture a premium relative to public bonds, often with deal structures that were more robust than public market transactions. The team also capitalised on the dislocation that emerged in the public markets earlier in the year.

RED believes that sustainable investment is central to successful long-term investor outcomes. It continued to evaluate the potential impact of climate change on real assets through in-house research, engagement with partners and peers, and the use of specialist climate change forecast firms. In particular, the team made significant progress in standardising data collection and analysis to identify relative physical and transitional climate-related impacts across direct investments in diverse geographies and sectors. RED will continue to be flexible in adapting and refining its approach to ensure overall investment impact is considered.

Looking forward, the outlook for real estate investment remains attractive. Market fundamentals are well-supported by rising replacement costs on the back of high inflation in labour and construction materials, the delayed supply-chain response, and other disruptions resulting from the pandemic. RED continues to see opportunities across key themes, particularly those that are well-supported by shifting consumer demand patterns, regulations and structural forces. In parallel, it remains mindful of headwinds – including pandemic-related risks – that may impact economic growth and a less favourable monetary policy environment.

The Division expects activity levels to remain high in 2022 and beyond, guided by its principles of developing partnerships with best-in-class managers around the globe and its focused, scaled approach to thematic investing.