Yield of Dreams: Where to Invest for Top Real Estate Equity Returns

As the old adage goes, a bird in the hand today, is worth more than two in the bush tomorrow. Achieving strong risk adjusted real estate income returns on equity investments, the “cash on cash” yield in a volatile economic and investment environment is becoming harder to find.

From 2010 to 2021, nearly all commercial real estate asset classes moved in positive synchronisation as the zero rates environment pushed values higher, and the post-GFC tech and financial services boom created record levels of occupier demand.

However, as inflation re-emerged in 2022, and central banks responded with sharp interest rate hikes, investors relying on a forever low rate environment had to broaden their view to achieve appropriate risk-adjusted returns.

Set against a backdrop of the prevailing “higher for longer” economic environment, and increasing geopolitical instability, allocating capital into various real estate sectors is proving complicated, given the wide variety of investment strategies on offer.

Not all sectors perform consistently through cycles, and in the current valuation environment, where the spread between market and book prices is widening, the ‘mark to market’ is more challenging than usual as the performance of sectors is significantly dislocated.

Crafting an “all-weather” real estate investment portfolio in this investment environment, where you can generate returns comfortably above those offered in the more liquid fixed income markets, requires a more active approach to due diligence.

Crafting an “all-weather” real estate investment portfolio in this investment environment, where you can generate returns comfortably above those offered in the more liquid fixed income markets, requires a more active approach to due diligence.

Forecasting income returns in the current, volatile economic environment is becoming far more challenging and creating greater uncertainty around real estate distribution yields. For investors, this means they are now shifting their focus to the cash yield, over the terminal yield, choosing the certainty of the assets cashflow in the near term, over long dated market risk.

In this paper we outline the structural challenges facing the real estate market, and how they are influencing the performance of each sector, and our playbook on how to allocate capital in order to maximise income yields on your equity investments. Determining the right equity strategy is critical, and comes down to your risk appetite as either a “wave maker”, who engineers returns through more opportunistic investments. Or a “wave rider”, who invests in thematics linked to long-term growth tailwinds.

To read the report in full click here.