Kim Wright of UBS Discusses Brexit and the Global Real Estate Market

REIT magazine: September/October 2016

Kim Wright, UBSKim Wright, global head of real estate with UBS, has covered the listed real estate sector for more than 20 years. She says her understanding of markets and the diversity of real estate companies has broadened significantly in the two decades by working in offices in London, Sydney and Hong Kong, her current place of residence. Above all, though, she credits a team-based approach to market analysis at UBS with helping her see the big picture when it comes to the global real estate market.

REIT: You’re responsible for coming up with UBS’s comprehensive global real estate outlook. That sounds like a herculean task. Walk us through the mechanics of how that comes together.

KIM WRIGHT: I work very closely with our team of 30-plus real estate analysts, together with UBS’s economists, strategists and other sector analysts across the globe. We research 230 listed real estate companies and REITs across 22 countries, encompassing the developed and emerging markets.

We look to identify and address the pivotal questions affecting listed real estate, globally, regionally and at an individual company level. We engage in primary research such as consumer surveys, geospatial analysis and web-mining to provide an early perspective and comprehensive answer to these key questions.

We have developed a series of multivariate regression models to assist with forecasting office and retail rents together with residential prices across many geographies. We detail our assumptions in forming our view, but appreciate that we don’t always have the answer. And so, we have developed a series of interactive models where clients can input their own assumptions and stress test the outlook for rents and prices. We hope it helps investors understand the future drivers, their relative importance and assist in shaping their view.

We provide a fully integrated global real estate view via a series of reports, including our Global Real Estate Analyser, REIT-All-About-It and our monthly strategy report. Our Global Real Estate Analyser provides a consistent top-down global perspective, addressing key industry questions and debates, complimented by deep dives into each geography from each of our country teams. We have developed proprietary valuation metrics to assist in the analysis.

REIT: How do you see the evolution of communications technology and information sharing affecting the behavior of real estate markets?

WRIGHT: Tenant demand has potentially been more robust than economic growth would suggest. We believe this has been driven by structural change. In the office sector, media and technology has been a large driver of tenant demand, as much as 20 percent of all office leasing in the U.S. in 2015. The growth in e-commerce and changing nature of retailing is resulting in reconfiguration of retailers’ supply chains and strong demand for well-located logistics space and smaller, edge-of-town facilities.

Growth in the sharing economy and a growing appetite for flexible working solutions is leading to burgeoning office demand. The data center REITs are well placed to leverage growth in demand for internet, video, mobile and cloud computing, delivering colocation, scale and connectivity to companies and customers.

REIT: How has Brexit influenced your outlook on the U.K. and European property markets?

WRIGHT: At this stage, there is limited evidence to assess the magnitude of the impact. The stock market has been the quickest to react, with the U.K. REITs pricing in a 15 percent decline in private real estate values. Some U.K. property funds revised valuations down 5 percent to 10 percent and closed to redemptions.

The result of the U.K. referendum poses a threat to the real estate sector initially via uncertainty, leading to occupier and investor decision making being put on hold. While we expect U.K. real estate values to fall, there are some mitigating factors, including weakness in the [pound] which may encourage inbound investment, low funding costs and gilt yields, and future projects more likely to be shelved.

More broadly, the global REIT universe (excluding the U.K. REITs) has generally performed well in the aftermath of the U.K. referendum, outperforming global equities. With 10-year Treasury yields moving lower and likely to stay lower for longer, the global REIT universe remains well placed to pick up renewed yieldbased flows. This "lower and slower" environment is likely to favor quality, well-capitalized REITs with sustainable dividend yields. (The caveat being that credit spreads remain stable and funding markets stay open and accessible.)

But, the next six months will likely bring with it heightened volatility as political developments over the U.K.'s vote to leave the EU emerge, including the way the U.K. government and the EU will approach exit negotiations.

REIT: Do India and China have enough institutional-quality real estate to support robust REIT markets? And how close are we to the upper limit on global real estate securitization?

WRIGHT: Over the past 22 years, REITs have grown rapidly around the world. In 1994, just five countries had REITs available for investment, now it's over 30. The data isn't perfect, but many sources suggest there is close to $30 trillion of investment-grade commercial real estate globally. The market capitalization of the listed real estate universe is approximately $2.6 trillion. Therefore, and adjusting for leverage, approximately 11 percent of the world’s investment-grade assets are owned by the REITs or listed real estate companies.

The “REIT revolution” is gaining pace across Asia. The Philippines, Indonesia, India and Malaysia are considering improvements to their legislation to make it more appealing to create REITs, or at least modernize their legislation. Our Indian analyst believes the Indian REIT market could grow into a $21 billion sector. The opportunity in China from the potential introduction of REIT legislation is also significant in our view.

The success of REITs in any of these countries will depend on appropriate legislation being in place, together with having the right opportunities in which to invest, which is linked to pricing, potential returns, structure and the strategy of the sponsor.

Very simply, if the proportion of real estate owned by the REITs moved toward that of Australia and the U.S., we could see a further $1.3 trillion in real estate assets securitized.

REIT: What is your outlook for the next 12 months?

WRIGHT: Political risks and macro uncertainty remains high and important for equity market performance, including the listed real estate universe, over the next 12 months. The super-sized returns from real estate are probably behind us, and we are seeing evidence of supply indigestion in some locations. Occupational markets holding up will be important.

Even so, the initial yield of real estate, when levered modestly, continues to provide a competitive return of 6 percent to 8 percent given low financing costs. But funding markets remaining open and liquid will be critical.

Kim Wright is UBS’s global head of real estate, responsible for formulating and presenting the UBS global real estate view. Wright joined UBS in 1996 and was co-head of Australasian real estate research prior to moving to the firm’s London office in 2007.

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