Artificial intelligence (AI), geopolitical change and the growing convergence between real estate and infrastructure are reshaping how physical space is used and valued, according to Pimco’s latest Real Estate Outlook.
As a result, the key question for investors, the bond giant’s report noted, is no longer whether values have bottomed, but what will drive returns in a world in which cap rates are likely to remain higher for longer,
In its report, Pimco stated: “The market has spent much of the past two years debating whether values have bottomed. We think that is the wrong question. Investors should instead ask what will drive returns when cap-rate compression no longer does most of the work. Managers will need to judge whether the assets they own, lend against or buy will remain relevant as occupiers, capital providers, and governments rethink the role of physical space.”
The report stressed three main areas that mangers and asset owners should be scrutinising. The first is AI.
According to Pimco’s report: “As technology reshapes economies, investors will need to focus on assets that remain operationally relevant and adaptable. Artificial intelligence has the potential to transform occupier demand, influence capital allocation and accelerate investment into digital infrastructure. Increased investment in AI infrastructure is expected to create opportunities across data centres and related real estate sectors.”
The next major issue identified by Pimco is the ongoing convergence between real estate and infrastructure, with the boundaries between real estate and infrastructure becoming increasingly blurred across sectors, including digital infrastructure, healthcare, student housing, senior living and public-sector assets.
“Investors should look for opportunities where resilient sectors intersect with powerful structural themes, including digitalisation, energy resilience, security and productivity growth,” the study found. “Rising investment in security and defence-related infrastructure could create additional demand for logistics, manufacturing, housing, research and development facilities and data centres.”
Third, Pimco’s latest real estate outlook suggested that “investors should go back to the basics and prioritise durable cashflows, downside resilience and predictable supply-and-demand dynamics”.
“The reset in values and slowdown in new development have improved the entry point for investors seeking durable income and asset-level alpha. Income quality, active management and operational execution are expected to become increasingly important drivers of performance.”
The research also highlights the need for flexibility across asset use, occupier mix, business plans, hold periods, capital structure and geography, which “is expected to become an increasingly important competitive advantage”.
“The strongest opportunities are likely to come from combining resilient sectors with structural themes while maintaining disciplined underwriting and a flexible approach to capital deployment,” the report noted.
“For investors, the implication is clear: performance will increasingly be determined by income quality, asset relevance and the ability to adapt to long-term technological, economic and geopolitical change.”
To read the latest IPE Real Assets magazine click here.
