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PGIM India Mutual Fund recently launched PGIM India Global Select Real Estate Securities Fund of Fund, which is India’s first global real estate securities fund. The earlier such schemes were largely focused on the Asia-Pacific region. The PGIM India scheme will invest into PGIM Global Select Real Estate Securities Fund, which primarily invests into Reits or real estate investment trusts and equity-related securities of global realty companies. Rick Romano, managing director, PGIM Real Estate and head of global real estate securities business, talked to Mint on how demand has changed post-pandemic and why real estate is expected to benefit from inflation. Edited excerpts:

 

How has the real estate trend changed in the post-covid world?

There were a lot of trends that started to accelerate during the pandemic. For example, the e-commerce impact on brick-and-mortar retail. Demand for e-commerce was pulled forward during the pandemic as people were forced to do so in the pandemic. So, that benefited global industrial warehouse Reits. One trend that was not really in place was work from home. And that’s going to have implications on office space, where there may be a global need for less office space. While that may be a detriment to office real estate, it really benefits another area of real estate such as data centres or cell towers. So, the need for streaming services on calls like Zoom calls, work from home (WFH), that has created tremendous demand for data centres, cell tower usage, and that’s an area in real estate that would benefit.

What kind of opportunities can a global real estate fund provide to Indian investors that they don’t have access to in the domestic markets?

What one can gain by investing in a global real estate strategy is diversification. If your local market is not growing as fast as the rest of the world, or happens to be in a recession, you get the diversification of being able to access other markets that might be in different points of the real estate cycle. Also, you can access some of the very high growth areas of real estate that might be difficult to access in the private real estate markets. So, that would include areas such as data centres, healthcare Reits, whether it’s assisted living hospitals or skilled nursing, cell towers, specialty living properties as well as self-storage and hotels. Also, liquidity; you can buy and sell at any point that you don’t typically have in real estate.

PGIM Global Select Real Estate Securities Fund’s one-year return is around 26% and five-year is around 7%. Going forward, what should be investors’ expectations?

When we think about Reits and real estate, we really think about them as a hybrid between a bond and a stock. So, they have bond-like qualities because they have a dividend. But that’s not fixed like a bond. The dividend can grow over time as a real estate company increases rents. So, your rent would increase by inflation every year, and that gets passed down to the dividend which is growing by inflation. Beyond that, the equity-light components, especially when you are talking about shorter lease duration, they can all reset rents very quickly, and participate in equity like growth as a result of that. When you think about it that way, you should expect for long periods of time, the returns to be in excess of bonds and closer to equities. Historically, over long periods, they have averaged about 10% annualized returns (in dollar terms) within the global Reit space.

Rising prices globally pose a risk to pricey stock markets. How will inflation impact global real estate?

I think that inflation historically has been an opportunity for real estate investors. When you look at returns and inflationary periods, you’ll see that Reits have outperformed general equities and bonds in those periods, and it’s partly because a lot of the leases have the underlying inflation protection built in. Also, you have construction cost inflation, which goes up a lot, which tends to limit supply. The only caveat is that you have to be careful about wage inflation. Those are the types of opportunities that are out there in real estate in an inflationary environment.

Will continued demand for work from home negatively impact returns going forward?

It is going to be a headwind to office demand. But, the good news about being in a global real estate strategy that’s diversified is that we don’t need to invest in office. In fact, in select regions, we’ve either been tactical, meaning we’ve had some tactical positions, or we haven’t owned it at all, recently. So, the menu of opportunities in the global real estate strategy allows us to invest in opportunities away from office if we think that’s going to be negatively impacted and have headwinds to work from home. Even beyond that, there are beneficiaries of work from home in the real estate global real estate strategy.

Reits as an investment vehicle is fairly new to Indians, and there is a small percentage of people who have started dabbling in it. What makes you confident that Indian investors will go for global realty?

Indian investors have a good understanding of real estate. Also, what we’ve seen in other parts of the world when introduced Reits is that there’s an appetite for diversification. Investors realize that real estate as an asset class can be a big diversification if they own stocks and bonds and local real estate. And it’s a good way for local investors to access best in breed global real estate. Once we’ve offered that in markets, I think investors have been attracted to those diversification benefits to the access to high-quality properties to increase their real estate exposure into different property types that they might not have access to locally.

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