The global macroeconomic environment may provide challenges for real estate investors, but the underlying fundamentals for most property types will be supportive of investment in the sector, according to Stephen Hayes, head of global property securities at First Sentier Investors.

First Sentier’s global property securities team invests in publicly traded real estate around the world, with a team of 10 and offices in Sydney, New York City and London.

Right now, there’s a lot of inflation coming through the system, globally, says Hayes. In addition, the geopolitical risks in Europe, following Russia’s invasion of Ukraine, have “added fuel to the inflation fire,” he notes. Supply-chain constraints are driving up costs as well.

“We’re expecting inflation to rise,” adds Hayes. He also expresses the view that there is a greater risk of a slowdown coming in 2023, given the current macroeconomic environment, stating, “the macro side is a bit up in the air.”

Real estate, however, is well placed and can serve as an inflation hedge. Given this, Hayes says, “public real estate will do well in such an environment.”

So, despite concerns about the macroeconomic environment, the “new economy” segments of the real estate industry are poised for strength. Hayes points to historically low vacancy rates in the logistics sector, especially in key global markets such as Southern California’s Inland Empire and New Jersey in the United States, Tokyo and Osaka in Japan, and London in the United Kingdom. “Europe is a little late to the game,” adds Hayes, but this creates opportunities.

Another broad investment thesis for global real estate investment concerns the residential sector. “Residential is really strong around the world,” states Hayes. “It doesn’t matter what country you’re in.”

Hayes expressed that residential investment, both multifamily apartments and single-family rental assets, is being driven by demographics, adoption of technology and societal change. Rising home prices have made affordability a concern, and Hayes points to a “greater propensity to rent” among younger generations. He says the new crop of apartment properties “caters to that demographic very well, providing a good lifestyle experience.”

Another advantage of residential investment: “If we go into a slowdown, these assets prove really defensive,” says Hayes.

Comparing private and public real estate markets, Hayes notes, “public valuations don’t look stretched.” He also mentioned there is a lot of global capital chasing private assets, including real estate, which has pushed private valuations higher.

“I think REITs are really well placed,” says Hayes. “Particularly if you’re investing globally, there’s always opportunities.”

Also, many REITs have demonstrated a real commitment to ESG. “Some of the REITs are global leaders in sustainability,” indicates Hayes, who points in particular to firms based in the United Kingdom and continental Europe.

“We have got to start considering embodied carbon,” says Hayes. “Not only is it the right thing to do, but, from a shareholder perspective, it could be costly not to do so.”

Loretta Clodfelter is senior editor of Institutional Real Estate Americas.