Diversification Benefits in Global REITs

How has the real estate trend changed in the post-Covid world?

There were a lot of trends that began to accelerate during the pandemic. For example, the impact of e-commerce on brick-and-mortar retail. The demand for e-commerce was further pushed during the pandemic as people were forced to do so during the pandemic. So, it benefited the global industrial warehouse REITs. One trend that didn’t really apply was working from home. And this is going to have an impact on office space, where there may be a global need for less office space. While this can be a detriment to office real estate, it actually benefits another area of ​​real estate such as data centers or cell towers. Hence, the need for streaming services like Zoom calls, Work From Home (WFH) on calls, which has created tremendous demand for use of data centres, cell towers, and is an area of ​​real estate that will benefit.

What kind of opportunities can a global real estate fund provide to Indian investors who do not have access to domestic markets?

What can be achieved by investing in a global real estate strategy is diversification. If your local market is not growing as fast as the rest of the world, or is bearish, you get the diversification of being able to access other markets that may be in different points of the real estate cycle. In addition, you can access some very high growth areas of real estate that may be difficult to access in private real estate markets. Hence, this would include areas such as data centres, healthcare retails, whether it is assisted living hospitals or skilled nursing, cell towers, specialty living properties as well as self-storage and hotels. In addition, liquidity; You can buy and sell at any point you would not normally have in real estate.

The one-year return of PGIM Global Select Real Estate Securities Fund is around 26% and the five-year return is around 7%. What should be investors’ expectations going forward?

When we think of real estate and real estate, we really think of them as a hybrid between a bond and a stock. Therefore, they have bond-like properties because they have dividends. But it is not fixed like a bond. Dividends can increase over time as a real estate company increases rents. So, your rent will increase with inflation every year, and this gets passed into the dividend which is growing by inflation. Also, equity-lite components, especially when you’re talking about a short lease term, can reset all rents very quickly, and consequently participate in growth like equity. When you think about it this way, you should expect for the long term, returns will be higher than bonds and closer to equities. Historically, over the long term, they have achieved an average annual return (in dollar terms) of around 10% within the global retail space.

Rising prices globally pose risks to the expensive stock markets. How will inflation affect global real estate?

I think inflation has historically been an opportunity for real estate investors. When you look at periods of returns and inflation, you’ll see that REITs outperformed common equities and bonds over those periods, and that’s partly because a lot of leases have underlying inflation protections. Plus, you have manufacturing cost inflation, which goes up a lot, limiting supply. The only caveat is that you have to be careful about wage inflation. They are the type of opportunity that exists in an inflationary environment in real estate.

Will the continued demand for work from home impact the returns going forward?

This is going to be a headwind for office demand. But, the good news about being in a global real estate strategy that is diversified is that we don’t have to invest in an office. In fact, in select areas, we have either been strategic, which means we have had some strategic positions, or we haven’t owned it until recently. So, the menu of opportunities in the global real estate strategy allows us to invest in opportunities away from the office if we think it’s going to be negatively impacted and there are headwinds to work from home. Beyond that, real estate is the beneficiary of work from home in the global real estate strategy.

REITs as an investment vehicle is fairly new to Indians, and there is a small percentage of people who have started working in it. What makes you confident that Indian investors will move to Global Realty?

Indian investors have a good understanding of real estate. Furthermore, what we have observed in other parts of the world when introducing REITs is that there is a hunger for diversification. Investors realize that real estate as an asset class can be a great diversification if they own stocks and bonds and local real estate. And it’s a great way for local investors to access the best of breed global real estate. Once we’ve introduced this to the markets, I think investors are attracted to the diversification benefits that come with increasing their real estate exposure across a variety of assets, to access to high quality assets. which may not be accessible locally.