A rebound in real estate returns for the first time since 2022 could signal a long-awaited recovery, potentially driving the return of institutional and retail capital flows, according to Chris McGibbon, Nuveen’s global head of real estate.
On a recent episode of Relative Return, McGibbon noted that there have only been three instances in the past four decades when real estate returns have dipped into negative territory, and the markets now seem to be nearing the end of the third occurrence.
In light of this, he outlined a “really interesting inflection point” for the asset class.
“For historical context, over the last 40 years, there’s been three times where real estate returns have gone negative. That is, negative total return, where the income return was not enough to offset capital depreciation,” McGibbon said.
The savings and loan crisis of the early 1990s marked the first such instance, followed by the Global Financial Crisis (GFC) in 2008–09.
The most recent period, which began in early 2022, was fuelled by inflation and subsequent rate hikes, he explained.
“It’s been an eight-quarter run of negative total return, mostly driven by those widened interest rates.
“Real estate, like most risk assets, like most private assets, really prices off of the risk-free rate. So when you increase that 250 basis points in a really short period of time, you get a corresponding increase in the discount rate that’s required to take on the risk of a risk asset or a private asset, and that brings the values down,” McGibbon told InvestorDaily.
However, the tides could be turning, he observed, with the latest June quarter seeing positive returns across geographies and sectors.
“If you look at other metrics, overall disinflation is really underway, where we’re getting back down to the 2–3 per cent range globally.
“Maybe some of the medicine that we all just took is taking its hold and working,” McGibbon said.
Examining the returns, he noted that the increase in real estate performance across various sectors and markets may indicate the onset of a long-term recovery.
“Normally when that happens, at least historically, it’s a pattern that stays for a few years,” he said, highlighting that the quarterly nature of private asset valuations often mean it takes multiple quarters, sometimes even multiple years, to reflect an upturn or downturn.
He added: “Hopefully we’ve turned the page on the corrective period, the basis has been reset and we’re going to go through a nice few years now of recovery”.
Investors moving off the sidelines
Notably, real estate’s renewed positive returns could entice institutional investors back into the spaces, according to McGibbon.
“I think a lot of capital has been sitting on the sidelines, waiting for the bottom to set in, watching very closely the private market valuations. Now that we’ve seen a quarter and, hopefully, a couple of quarters of uptick, that’s usually when they move,” he said.
McGibbon pointed out that in the years following the GFC, investors stepped off the sidelines as soon as returns stabilised and began to rise.
“Instead of trying to redeem from funds, they rescinded those redemption requests, and then it turned back into contribution queues pretty quick because people didn’t want their money back at those reduced values. Instead, they wanted to kind of redeploy.
“We’re [now] seeing institutional demand because groups are unallocated. They’ve been really slow on their pacing plans in the last couple of years because it was a bit of a falling knife, and now that the knife has stopped falling, I think we’re going to see a lot more demand.”
He foresees similar trends when it comes to retail investors as they increasingly acknowledge the diversification benefits of alternatives like real estate in portfolios.
“More and more, we’re seeing individuals coming in as a diversified play, especially now that the income return is really accretive to fixed income again,” McGibbon said.
