A rebound in property yields for the first time since 2022 could signal a long-awaited recovery, potentially leading to the return of institutional and retail capital flows, according to Chris McGibbon, global head of real estate at Nuveen.
In a recent episode of Relative Return, McGibbon noted that there have only been three instances in the last four decades where real estate yields have plunged into negative territory, and markets now appear to be nearing the end of the third event .
In light of this, he highlighted a “really interesting inflection point” for the asset class.
“In historical context, over the last 40 years, real estate yields have gone negative three times. That is, a negative total return, where the income return was not sufficient to compensate for the capital depreciation,” McGibbon said.
The savings and loan crisis of the early 1990s was the first such example, followed by the global financial crisis (GFC) in 2008-2009.
The most recent period, which began in early 2022, was fueled by inflation and subsequent rate hikes, he explained.
“This has been a run of eight quarters of negative total returns, primarily driven by rising interest rates.
However, the tide may be turning, he observed, with the final June quarter seeing positive returns across all geographies and sectors.
“If you look at other indicators, overall disinflation is really happening, and we’re moving back down to the 2-3% range globally.
“Maybe some of the medication we all just took is taking effect and working,” McGibbon said.
Looking at returns, he noted that increasing real estate performance across various sectors and markets could indicate the start of a long-term recovery.
“Normally when this happens, at least historically, it’s a trend that persists for a few years,” he said, noting that the quarterly nature of private asset valuations often means it takes multiple quarters, sometimes even several years, to reflect a recovery or increase. slow-down.
He added: “I hope that we have turned the page on the correction period, that the basics have been reset and that we are now going through good years of recovery.”
Investors stay away
According to McGibbon, renewed positive returns from real estate could in particular encourage institutional investors to return to this sector.
“I think a lot of capital has been sitting on the sidelines, waiting for the bottom to set in, watching private market valuations very closely. Now that we’ve seen a quarter and hopefully a few quarters of upside, that’s usually when they move,” he said.
McGibbon pointed out that in the years following the GFC, investors pulled out as soon as yields stabilized and started to rise.
“Instead of trying to recover funds, they canceled these redemption requests, and then it turned into contribution queues pretty quickly because people didn’t want their money returned at these reduced values . Instead, they wanted to sort of redeploy.
“Were 1735239049 see an institutional request because the groups are not assigned. They’ve been very slow in their pacing plans over the last couple of years because it was a bit of a falling knife, and now that the knife has stopped falling, I think we’re going to see a lot more demand.
He foresees similar trends when it comes to retail investors, as they increasingly recognize the diversification benefits of alternatives such as real estate in portfolios.
“Increasingly, we’re seeing individuals step in in a diversified way, especially now that income yield is really accretive again for fixed income,” McGibbon said.
