Market perception can change quickly. Real estate linked assets were widely criticized as contributing to the onset of the financial crisis. Widespread financial market uncertainty in 2008 and 2009 meant that investors looked to exit risky positions including real estate. Investors subsequently discovered that a flight to safety doesn’t pay well against a backdrop of slower growth and lower rates. Sustained low interest rates have left investors with a problem: they need income. As a solution, many have returned to core real estate earlier than we may have anticipated, in order to benefit from the sector’s income return characteristics. This search for income is putting in sharp focus the relative pricing of risk across real estate assets with different characteristics. Broadly speaking, real estate is a hybrid of bond-like cash flow from rental income and equity-like gains from capital appreciation. Core real estate, by definition, carries low leverage and stable tenants, which reduces risk and produces distributable income. Core real estate strategies focus on the income return, while opportunistic strategies focus on capital growth and value-add strategies balance the two.
Source : UBS AG