Most major economies have now come out of recession, and the prospects for real estate investment are looking a little brighter. However, some economies continue to teeter on the brink. If they were to fall, could they pull the global economy down with them?
Rents for industrial real estate are generally down by 10 to 20 percent on an effective basis from their 2008 peak and are well below levels that support new construction. In some markets, effective rents are at levels not seen in more than a decade. The good news, however, is that rents are very likely to increase in many hub and gateway markets in 2011 and more broadly in 2012.
Since the mid-1980s, European real estate markets have experienced three expansionary cycles and three downturns. AEW Europe's research indicates that we are now at the inflection point for entering another upswing. We don’t believe that this upward leg in the cycle will be as strong as those seen in the late 1990s and between 2002 and 2006, but we do think it will be robust enough to sustain a decent performance for a core investment strategy — generating IRRs in the area of 6 percent to 8 percent per year over the medium to longer term.
A major recession, a property crash, an election looming with an incumbent prime minister (a former finance minister) who is defending the record of a government that has been in power for 13 years and the real estate industry racked by insecurity as to its future. We are talking, of course, about the United Kingdom in 1992 and not in 2010, but the similarities are striking and do not end there.
The purpose of this article is to question whether the use of debt in real estate investment is, indeed, a pre-requisite or if “ungeared” returns are a realistic alternative. It is pertinent to ask this question at this time, as excessive debt in some property funds has harmed rather than assisted performance.
Research is the bedrock of real estate investment. Instinct is fine, but without the data, analysis, trend recognition, thoughtful processes and sound theory, investors and fund managers cannot defend the decisions necessary to support their investment strategies. The real estate business is notable for the number of people who are active at a senior level in research roles in insurance companies, consulting firms, fund managers and academia. A smaller number have been able to move seamlessly between and within sectors.