Now in the second year of the coronavirus pandemic, how has commercial real estate yield and prices around the world held up? Should you consider holding real estate in your investment portfolio? Kim Parlee talks to Colin Lynch, Head of Global Real Estate Investments at TD Asset Management.
- Colin, great to have you here. It's been almost a year. And equity markets have, for the most part, recovered since the correction last March. What's happened with commercial real estate?
- Well, Kim, it's good to be here as well and thank you for having me. Overall, real estate has held up, particularly when you compare to previous downturns such as the global financial crisis or 9/11 where we saw much more substantial declines in valuations, particularly in the USA.
What's led to that? I think lower interest rates have helped in addition to global liquidity, which has been helped by central bank action. I would say, however, performance has been very uneven.
Defensive retail, industrial parts of multifamily have performed well. Office and luxury retail, not so much. And there's also been very interesting geographic variances as well. Asia-Pacific has performed quite a bit better than the Europe or USA. And even within the USA, we've seen different geographies perform better than others.
- It really does speak to the need of active management, which, of course, is I'm sure music to yours and your colleague's ears. I want to bring in a chart that I know that you've shown me before. And this takes a look at asset class, expected returns. And tell me what's interesting about this.
I mean, if we look at the chart, the right-hand side, it seems that the dispersion, if you will, of the dots is much smaller than the left-hand side.
Yes, well, that's exactly it. And that dispersion is what contributes to volatility. And by having institutional real estate, one has lower volatility and not just that lower volatility, but also the lower correlation to public securities such as equities and fixed income. So it's really that portfolio diversification, the risk-adjusted return that gets enhanced by holding real estate in the portfolio.
You touched on the fact that you're seeing when you lift the hood, it really depends on what sectors and what geographies you're looking at. But just maybe tell me if you wouldn't mind when you look at America, when you look at Europe, when you look at Asia, what are you seeing?
- Sure. So quick whistle stop tour. In America, we've seen migration from denser cities such as New York and San Francisco. And those cities have been higher cost ones as well. That's not being a new thing due to COVID, because over the last 15 years, we've seen emigration from those cities to lower cost ones.
What's happened as a result of COVID is immigration internationally into the US, which has tended to go to cities such as New York and San Francisco, has temporarily stopped. And so the net result has been those cities, like New York and San Francisco, have seen much more impact as a result of COVID-19.
Where have the beneficiaries been? Cities such as Atlanta, Raleigh, Durham. In the US and in Europe, there's been a lot of discussion about work from home, whether that's going to be permanent. We've seen valuations move down in retail because of some pessimism on the space. And conversely, industrial valuations have increased as a result of broad enthusiasm.
What's really interesting is in Asia where governments have had a lot more success with the impacts of the pandemic. And what's interesting there is that the work from home environment isn't as pronounced. And so offices from Hong Kong to Japan to Australia have been more than 70% physically occupied at times. And so as a result, there's been a lower amount of discussions on work from home in the Asia-Pacific region.
- You know, it's really fascinating you should say that because I guess when you think about what the permanent structural impact is going to be, you probably looked to Asia to see what's happened now. They've maybe more normalized versus other places. And it must be more a little more tricky to determine.
- Well, yes. And that's a really good point. We do have to recognize what we're living in which is a global health crisis. And governments around the world have encouraged us to do our part by staying inside. But we also have to recognize that we are in the moment.
And so it's a bit difficult to draw very long-term conclusions about the impact of this moment based off of what we hope will be a temporary crisis. And so to your point, we've seen different parts of the world react differently. And that gives us the ability to look around and to see how might a future world post-pandemic look like. And we think the Asia-Pacific is a very interesting place to look.
- Well on that, Colin, I've only got about a minute left. But I I'd like to just bring up if I could. We've got to look here at how you've structured your portfolio in the TD Greystone Global Real Estate Fund. We've got to look at location, property types, and city exposures. But let's start with the location and property types. And you can tell us a bit about that.
Yeah, diversification is key. And so we've had the global portfolio structure to provide exposure to multiple regions and multiple property types. We'll have shocks in the future. What we don't have is a crystal ball to say exactly economically or from a real estate perspective, where will these shocks occur? And so we believe in that diversification, but also in terms of having exposure. For instance, in retail to defensive retail such as grocery stores and do-it-yourself stores. That's incredibly important.
From a city perspective, ultimately we like cities that have strong demographic characteristics such as Melbourne or Sydney, growing cities where the demand for real estate will increase over time, as well as cities where we see attractive tailwinds such as e-commerce penetration. Australia has room to grow. And we like having exposures to cities and countries with some of those favorable dynamics.
- Colin, I've only got about 10 seconds here, but I'm curious. If we bring out the list here of your top city holdings, you mentioned Australia and Melbourne, Sydney. And I think you've got if we look at the chart here, the three are some of your top ones are on Australia. What's special about Australia?
Yeah, immigration. In a similar way to Canada, one of the most attractive countries in the world for immigrants around the world. And so we think that that country has very positive demographic tailwinds. And that's really propelled by the attractiveness of its post-secondary sector in Australia. So we're very constructive on the country.
Fascinating stuff, Colin. Thanks so much.
- You're welcome.