Credit: abrdn plcAnne Breen: Optimism amid repricing, controlled inflation and income growth
Abrdn's Global Head of Real Estate, Anne Breen, discusses optimism for 2024 and outlook on offices, AI and ESG
February 7, 2024Real Estate
Written by Helen Richards
Ahead of the GRI UK & Europe Reunion 2024, GRI Club had the pleasure of sitting down with Anne Breen from abrdn. As Global Head of Real Estate, Anne will be among the expert discussion provocateurs at the event, moderating the ‘Back to the New Normal of Real Estate’ panel.
Abrdn is a global investment company administering GBP 542 billion of assets for clients, with over 1 million shareholders, and operating across 20 locations worldwide. As we enter 2024 with hopes for increased transaction volume within the “new normal” of real estate, Anne reveals her outlooks on the year ahead, as well as perspectives on pressing real estate matters, including AI, offices, and ESG.
Read more about the GRI UK & Europe Reunion 2024 and register here.
What do you expect from the European real estate market in 2024?
I'm optimistic, is the first answer. The principal reason for being optimistic is that real estate, whether it's in the UK or in most European countries, has repriced in line with interest rates, and has therefore started to offer value again for investors. The illiquidity premium, which had disappeared for a while, has started to reemerge. Pricing has adjusted largely; there are still some parts of the market that need to adjust further, but from this year forward it will start to look very interesting.
We've still got quite a restricted amount of supply in some sectors, and so from an income perspective, we can still generate income growth for many of our clients. The recovery and the next stage of the cycle is upon us now that interest rates have largely peaked and the excess of inflation has become more under control.
Therefore, as we move towards the end of this year and further out, with lower interest rates and continued growth, it starts to look really quite healthy for clients.
Which asset classes are you most optimistic for?
We haven't changed our favourite sectors through the cycle. Repricing has happened because of the interest rate cycle. Actually, the underlying asset classes in real estate that look good, looked good before that, and that's because of the income growth. Those favoured views haven't changed through this recent cycle, but now we have an extra little bit of yield, meaning it is a more compelling story.
The living sector generally, which is private rented accommodation, student accommodation, senior living, and distribution warehouses and logistics assets, still deliver healthy rental growth in many markets that we invest in. And we're still really interested in the impact of technology, whether that's to do with power or data centres.
We've got a few data centres in our funds, but the interesting thing about data centres is power. Power is the key component. We’ve been looking more at power generation and power storage, which could be an interesting foothold through into data centres.
What is your strategy regarding offices?
Unlike previous cycles, you can have two offices right next door to each other that will perform very differently. The quality of the asset is more important than it's ever been. We think there's going to be a polarisation - the best versus the rest.
Our view is to assess what we consider to be a future-fit office, and we use a process called FACTS to assess that, which is Flexibility, Amenity, Connectivity, Technology, and Sustainability. Those assets that we think are future fit score very highly on a FACTS basis, but it's a very small percentage of the market.
The problem for offices is that there's likely to be a continued decline in value in large parts of the market, and the best quality assets with highly rated FACTS will perform much better.
Abrdn foresees strong polarisation among office assets: “The best versus the rest.” (Credit: abrdn plc)
Any sectors where you feel you may have missed the boat?
Self-storage is an interesting one which has performed well through the last cycle. We tend to manage quite large funds, so for us to be able to get the level of exposure that's required is quite tricky. They obviously need to be operated efficiently, but if you buy into the idea of a shrinking home footprint, and more flexibility around a greater rented population, then I think they will continue to perform well.
The other one is data centres, but as I mentioned I think the power element is really important to data centres, hence why we've been focusing on how we can invest through power and generate the appropriate power source for data centres.
What is your ESG strategy? Do you think it's becoming more or less prioritised?
Going forward ESG will have the single biggest impact on value. It will be the biggest polariser.
In the last few years, we've had an awful lot of investors that have stated their ambition in a net zero sense, but without actually having the detailed knowledge and the granular knowledge of what's required to bring assets up to that level. Now the investment community is starting to do their homework on what that means, and what capital actually needs to be spent on the assets. I don't think this has truly reflected in valuations yet. So, it's even more important than it was before, given that there's better and more detailed knowledge being built up on what it actually means to achieve net zero.
From our perspective internally, the E part has always been really important. It's the easy part. You can reflect that in your data and analysis of underlying assets. The difficult part is the S, and that's the bit that's going to change. The social impact part is where there's going to be greater emphasis going forward than there was historically. We're increasingly talking now about not just the environmental credentials of the asset, but what parts of the community should we invest in in the building to ensure that it's actually having a social impact and not just a financial impact.
How can you bring social value to an asset?
It depends how you measure value to society, as well as the asset and the location. For example, we had an asset that we refurbished, and through the refurbishment we included an outdoor exercise area, beehives, and a combination of nature and community space. But you can't do that in every asset, so there are more typical measures which impact local employment and have a positive impact on the community in terms of community space and engagement.
It's not so easy to measure value to society. It's hard to put a single monetary unit, whether it's pounds, power, or impact, but as long as it's there as one of the priorities, that is the important thing.
Do you think the environmental part of ESG creates more value for the asset than the social part?
It depends, because the social part becomes more important depending on the impact the asset has on the community and the social environment. For example, a warehouse in a peripheral location on the edge of a motorway is more likely to have an environmental impact, but a retail parade in the centre of a local community is going to have a different impact - it's less about the environment and more about community space and engagement.
You'll be co-chairing on the Back to the New Normal of Real Estate panel at the GRI UK & Europe Reunion 2024 later this month. What are you most looking forward to discussing at the session?
I'm most interested in hearing perspectives on things that we don't have the answers to yet.
We don't really have the answers to artificial intelligence and the way that it's going to disrupt our industry. We haven’t cracked the idea of ESG data, and as I mentioned, the value to society. How do we measure the impact that real estate is having?
What is your perspective on AI in the real estate industry?
Our industry must be open to disruption by AI because we're a human heavy and data heavy industry. However, from what I've seen so far, potential artificial intelligence solutions for the industry will be helpful in decision making, but they won't be the drivers of decision making. They bring connections to the past but not necessarily the pathway to the future. I'll be happy to be proven wrong on that!
AI will be very important for us as an industry in data aggregation, data manipulation, and providing more in-depth insight into decisions. And actually, it might have a seat at a table in an investment committee, why would it not? However, in terms of leading the way forward from here, I'm yet to be convinced.
Join the discussion with Anne Breen and other leading real estate players at GRI UK & Europe Reunion 2024.
Read more and register here.
Ahead of the GRI UK & Europe Reunion 2024, GRI Club had the pleasure of sitting down with Anne Breen from abrdn. As Global Head of Real Estate, Anne will be among the expert discussion provocateurs at the event, moderating the ‘Back to the New Normal of Real Estate’ panel.
Abrdn is a global investment company administering GBP 542 billion of assets for clients, with over 1 million shareholders, and operating across 20 locations worldwide. As we enter 2024 with hopes for increased transaction volume within the “new normal” of real estate, Anne reveals her outlooks on the year ahead, as well as perspectives on pressing real estate matters, including AI, offices, and ESG.
Read more about the GRI UK & Europe Reunion 2024 and register here.
What do you expect from the European real estate market in 2024?
I'm optimistic, is the first answer. The principal reason for being optimistic is that real estate, whether it's in the UK or in most European countries, has repriced in line with interest rates, and has therefore started to offer value again for investors. The illiquidity premium, which had disappeared for a while, has started to reemerge. Pricing has adjusted largely; there are still some parts of the market that need to adjust further, but from this year forward it will start to look very interesting.
We've still got quite a restricted amount of supply in some sectors, and so from an income perspective, we can still generate income growth for many of our clients. The recovery and the next stage of the cycle is upon us now that interest rates have largely peaked and the excess of inflation has become more under control.
Therefore, as we move towards the end of this year and further out, with lower interest rates and continued growth, it starts to look really quite healthy for clients.
Which asset classes are you most optimistic for?
We haven't changed our favourite sectors through the cycle. Repricing has happened because of the interest rate cycle. Actually, the underlying asset classes in real estate that look good, looked good before that, and that's because of the income growth. Those favoured views haven't changed through this recent cycle, but now we have an extra little bit of yield, meaning it is a more compelling story.
The living sector generally, which is private rented accommodation, student accommodation, senior living, and distribution warehouses and logistics assets, still deliver healthy rental growth in many markets that we invest in. And we're still really interested in the impact of technology, whether that's to do with power or data centres.
We've got a few data centres in our funds, but the interesting thing about data centres is power. Power is the key component. We’ve been looking more at power generation and power storage, which could be an interesting foothold through into data centres.
What is your strategy regarding offices?
Unlike previous cycles, you can have two offices right next door to each other that will perform very differently. The quality of the asset is more important than it's ever been. We think there's going to be a polarisation - the best versus the rest.
Our view is to assess what we consider to be a future-fit office, and we use a process called FACTS to assess that, which is Flexibility, Amenity, Connectivity, Technology, and Sustainability. Those assets that we think are future fit score very highly on a FACTS basis, but it's a very small percentage of the market.
The problem for offices is that there's likely to be a continued decline in value in large parts of the market, and the best quality assets with highly rated FACTS will perform much better.
Abrdn foresees strong polarisation among office assets: “The best versus the rest.” (Credit: abrdn plc)Any sectors where you feel you may have missed the boat?
Self-storage is an interesting one which has performed well through the last cycle. We tend to manage quite large funds, so for us to be able to get the level of exposure that's required is quite tricky. They obviously need to be operated efficiently, but if you buy into the idea of a shrinking home footprint, and more flexibility around a greater rented population, then I think they will continue to perform well.
The other one is data centres, but as I mentioned I think the power element is really important to data centres, hence why we've been focusing on how we can invest through power and generate the appropriate power source for data centres.
What is your ESG strategy? Do you think it's becoming more or less prioritised?
Going forward ESG will have the single biggest impact on value. It will be the biggest polariser.
In the last few years, we've had an awful lot of investors that have stated their ambition in a net zero sense, but without actually having the detailed knowledge and the granular knowledge of what's required to bring assets up to that level. Now the investment community is starting to do their homework on what that means, and what capital actually needs to be spent on the assets. I don't think this has truly reflected in valuations yet. So, it's even more important than it was before, given that there's better and more detailed knowledge being built up on what it actually means to achieve net zero.
From our perspective internally, the E part has always been really important. It's the easy part. You can reflect that in your data and analysis of underlying assets. The difficult part is the S, and that's the bit that's going to change. The social impact part is where there's going to be greater emphasis going forward than there was historically. We're increasingly talking now about not just the environmental credentials of the asset, but what parts of the community should we invest in in the building to ensure that it's actually having a social impact and not just a financial impact.
“Going forward ESG will have the single biggest impact on value.” (Credit: lifeforstock | Freepik)
How can you bring social value to an asset?
It depends how you measure value to society, as well as the asset and the location. For example, we had an asset that we refurbished, and through the refurbishment we included an outdoor exercise area, beehives, and a combination of nature and community space. But you can't do that in every asset, so there are more typical measures which impact local employment and have a positive impact on the community in terms of community space and engagement.
It's not so easy to measure value to society. It's hard to put a single monetary unit, whether it's pounds, power, or impact, but as long as it's there as one of the priorities, that is the important thing.
Do you think the environmental part of ESG creates more value for the asset than the social part?
It depends, because the social part becomes more important depending on the impact the asset has on the community and the social environment. For example, a warehouse in a peripheral location on the edge of a motorway is more likely to have an environmental impact, but a retail parade in the centre of a local community is going to have a different impact - it's less about the environment and more about community space and engagement.
You'll be co-chairing on the Back to the New Normal of Real Estate panel at the GRI UK & Europe Reunion 2024 later this month. What are you most looking forward to discussing at the session?
I'm most interested in hearing perspectives on things that we don't have the answers to yet.
We don't really have the answers to artificial intelligence and the way that it's going to disrupt our industry. We haven’t cracked the idea of ESG data, and as I mentioned, the value to society. How do we measure the impact that real estate is having?
What is your perspective on AI in the real estate industry?
Our industry must be open to disruption by AI because we're a human heavy and data heavy industry. However, from what I've seen so far, potential artificial intelligence solutions for the industry will be helpful in decision making, but they won't be the drivers of decision making. They bring connections to the past but not necessarily the pathway to the future. I'll be happy to be proven wrong on that!
AI will be very important for us as an industry in data aggregation, data manipulation, and providing more in-depth insight into decisions. And actually, it might have a seat at a table in an investment committee, why would it not? However, in terms of leading the way forward from here, I'm yet to be convinced.
Join the discussion with Anne Breen and other leading real estate players at GRI UK & Europe Reunion 2024.
Read more and register here.
