With the main corners of the global markets vulnerable to ongoing uncertainty and deteriorating economic performance, investors continue to seek safety wherever available. The issues that affect real estate today are similar to those in other asset classes: low spreads for quality exposure such as core real estate and high spreads for risk exposure. Investors are seeking liquidity almost at all costs. This is not surprising. In times of uncertainty, investors are willing to pay up for certainty. Of course, the clear risk is that when the event(s) insured against happen, the risk premium will begin to unwind. In August 2011, we concluded that, comforted by relative pricing (i.e. historically high spreads to what is available on relatively risk-free bonds), investors would remain anchored in core real estate strategies.
Since then, growth has disappointed globally with data falling short of forecasts. Fundamental support for low-risk, defensive strategies remains strong, while the prospects for strategies requiring growth continue to look precarious in light of deteriorating macroeconomic conditions. With seemingly innumerable tail risks to insure against, including a heavy nearterm political agenda, we still believe investors choosing core (i.e. low-risk) strategies are rationally pricing risk. Similar to other asset classes, in real estate, quality exposure is not necessarily cheap these days. However, we would argue that the available spreads remain attractive, as do the absolute levels of yields, which should appeal to investors starved of current income as well as the more traditional buy-and-hold real estate investor.
Source : UBS AG