February 8, 2022
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Eye of the Tiger: What’s ahead for 2022

While you may be thinking that it is a bit late in the year to be looking at predictions for the success of the institutional real estate market, it’s actually the perfect time. The lunar New Year celebration just happened and the year of the Tiger is underway. So, perhaps a shift in perspective away from the calendar new year of January first is needed to better understand 2022. 

Unlike other asset classes which are super volatile (public equities) or are tied to macro economic policies (think corporate bonds), real estate is always a bit of a laggard. Why?

  1. Valuations of the assets only occur at most on a quarterly basis and typically only once a year. Could you imagine a stock market that only priced a stock at this frequency? The whole efficient market theory would be thrown out the window.  However, real estate does not require daily or weekly valuation since the inputs to the valuation models don’t really change too often during the year i.e. tenants leaving.
  1. Unlike other asset classes, owners of large real estate portfolios are only able to officially close their books once the valuations are completed and the income statements have been reconciled. The closing of the books takes a long time due to the large number of tenants to collect rents from and also complex accounting required to process expenses (operating and capital). It is common practice at most large asset owners, like Canadian pension plans, that the last asset class to submit their annual results is Real Estate.  This is why you see such a lag in the final annual results being published each year (i.e it's not uncommon to see annual reports being released in May of the following year).  Once the real estate returns are submitted the entire portfolio results can then be processed, but this takes most of the first month of the year to reconcile.
  1. Performance benchmarks or indexes are usually not published until one or two months after the quarter ends. The global real estate industry does rely on performance indexes for things like remuneration of management teams, risk analysis and attribution of results. Canada is a leader in the institutional real estate sector and the main performance index published by MSCI is released approximately a month after the quarter ends (by the way, Canada had an above average performance of just shy of 12% for the year). The Canada index release is considered to be quite early and is a testament to the sophistication of the large investors here in Canada. However, it is still a fair amount of time to wait for these important numbers. 

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So, these are three reasons to not worry about a delay in the forecast for what 2022 or the year of the tiger will look like for the real estate industry. Here are a few tiger related ideas to ponder for 2022.

First, the most widely known tiger in Canada is “Tony the Tiger” from the Frosted Flakes cereal fame. The slogan of “They’re Great!” has to be one of the best product taglines. Our sense is that in 2022 we could position this to be “Real Estate is Great!”. Due to continued uncertainty in the overall market, investors will continue to want to own quality real estate assets and thus will increase their allocation to real estate over other asset classes like fixed income. It’s no secret that the US Federal Reserve and the Bank of Canada will be raising interest rates in 2022. This is due to the high levels of inflation that seem to be affecting consumer goods, fuel prices and of course, your favorite box of cereal, Frosted Flakes. So, while real estate assets will not be cheap, they will offer investors inflation protection, steady income and yes, even valuation increases due to capitalization rate compression.   

Secondly, as we stick to the theme of consumer goods, Tiger Beer is a well known brand in Singapore. While this blog won’t do any throwback analogies to the “Tiger Economies” of decades past, it is apt to look outside of the North American market for indications of the success of real estate. In order to continue to achieve strong investment performance returns and also ensure a well diversified portfolio, investors will continue to look to Asia for quality assets. These economies will continue to evolve and it will be important for large institutional investors to participate in the growth in all of the real estate sectors. The middle class in these emerging economy populations will drive the need for quality residential assets, their buying patterns will require industrial warehouses/logistics, the need for modern office space and of course, retail assets for shopping will drive this demand. 

Thirdly, for any athletes out there who have used Tiger Balm on their sore muscles, it is another good consumer product to use in our Year of the Tiger analogies. If you have ever used Tiger Balm, it does not feel great when first applied. However, after a few minutes, the initial burn turns into a muscle relieving sensation. This is an apt analogy for 2022, the first few months will be uncomfortable as society and the economy recovers from Omicron related closures in January. However as we work our way through the winter months, the economy will, just like sore muscles, start to feel better and even start to get stronger, just like an athlete's strength improves with more training.  

Finally, the Year of the Tiger will be an exciting one for all real estate investors. The main advice that the Altrio team has for our clients and prospects is that it is important to think like a tiger, when out there hunting in the urban jungle for the perfect asset. The Tiger is a top of the food chain predator and is known to stalk its prey until the odds of success are absolute. So, while we don’t recommend a diet of Frosted Flakes or having too many Tiger beers, it is key to have the song “Eye of the Tiger” in mind when out there acquiring assets in 2022.

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