Thought of the Week
How have different sectors performed after previous market troughs?
May 30, 2024 3 Minute Read
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Our research has shown that purchasing UK real estate at the trough of the last two downturns would have enabled investors to achieve above average returns. This analysis was based on an all property performance index.
However, the performance of different property types has varied over time. So have investments in different sectors of the real estate market brought similar benefits following a downturn or have some property types fared better than others if purchased at the trough of the market?
Figure 1 below shows the average annualised total return from investing in different types of commercial real estate over a five-year hold period, together with the same statistic for investments made at the trough in values in the early 1990s and the trough that followed the Global Financial Crisis (GFC) in 2007-08.
Figure 1: Annualised returns over five year holding periods: overall average and investing at previous troughs
Sources: CBRE Research, MSCI UK Monthly Index
The first observation is that investment at the trough of the market into any of the three sectors shown would have performed better than the long-run average return from a five-year hold in each sector. For UK offices, the excess or spread over the average annualised return was 4.0% when investing at the trough in the early 1990s and 5.0% when investing post-GFC. In comparison, the relative benefit from investing at the trough has been smaller in the industrial sector, but investments at those times still provided a healthy absolute return to investors.
The property type that provided the best returns after each market trough was not always the same. After the early 1990s downturn, retail provided the highest total return for a subsequent five-year hold, followed by industrials, then offices. However, it was offices that provided the highest return for the five years following the GFC trough, followed by industrials, then retail. This shows that structural trends matter as well as investment timing, since retail returns started to be affected by changes in consumer behaviour in the post-GFC period.
Nonetheless, for all sectors, purchasing at the trough of a downturn normally provides a performance advantage for investors with the ability to act. Which sector will take the lead after the recent downturn is less certain. Could it be residential real estate, now more firmly established in UK investment portfolios, or could the rebasing of office, retail, or industrial values provide a platform for one of these sectors to deliver the strongest returns moving forward?
Thought of the Week
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