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International and Emerging Real Estate Semi-Annual Outlook

May 2020*

Navigating Out of the COVID-19 Storm

Health policies critically affect the likelihood of a second wave of COVID-19 and the prospect of economic recovery, which in turn drive consumer and business confidence and the outlook for real estate.

The COVID-19 pandemic has had a profound impact on the real estate sector. Hotels and retail real estate were hit first with international travel restrictions and quarantines. Lockdowns and social distancing then significantly dampened the usage of offices. Recessionary conditions have driven a sharp rise in the number of unemployed (e.g. the US) and furloughed workers (e.g. Europe), which in turn weigh on residential real estate. Excess deaths in nursing homes raise public concern about healthcare real estate. In comparison, industrial real estate is less impacted by social distancing, while investors are optimistic about data centres and infrastructure real estate as work from home arrangements and virtual meetings boost internet usage.

Chart 1: Historical Net Total Returns, %

*Annualized rate.

Source: FTSE EPRA/NAREIT Indices, MSCI Indices, Bloomberg as of April 30, 2020.

The year-to-date performance in different sectors largely reflects the effects of the pandemic. Hotels and retail real estate are the worst performers, whereas data centres and infrastructure real estate have delivered positive returns despite the global recession. In between are offices and healthcare real estate, and the pandemic has long-term ramifications for those assets. For instance, despite more employees working from home, social distancing may require employers to increase interpersonal space in the office, reversing the decade-long trend of shrinking square footage per capita.

Therefore, the real estate outlook depends on confidence (and fear), e.g. how many people are willing to return to offices and shopping malls, how many are willing to travel and stay in hotels, and how much they are able to spend. That, in turn, largely depends on the degree of success of public health and economic policy responses to COVID-19, which vary among countries. For instance, even though many countries have started to reopen, some may experience lacklustre confidence and private-sector spending for a relatively long period of time due to mistrust/confusion about government policies, job insecurity and/or fear about a second wave of infections. In other words, country differentiation matters in the post-COVID-19 era for real estate.

*The publication reflects asset performance up to 30 April, 2020, and macro events and data releases up to 11 May, 2020, unless indicated otherwise.

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The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

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All rights reserved.

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA), registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC) and regulated by the Dubai Financial Services Authority (DFSA). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2020 City of London Investment Management Company Limited. All rights reserved.