Real estate investors slackened their pace due to the Covid-19 pandemic – but not by much. And the appetite for further investment in bricks and mortar is set to increase substantially, it is suggested.
According to figures collated by ANREV, INREV and NCREIF, global real estate investment managers raised EUR123bn during last year, all intended for investment in non-listed property.
The figure was down on 2019’s EUR196bn, as close to a third of investment managers halted fundraising, many blaming a lack of product to invest in for their decision. But the average capital raised for each active vehicle was up, to EUR0.8bn. And despite the apparent lack of product, more than half of the funds raised have already been deployed.
According to the survey, 41% of funds raised were allocated to vehicles targeting Europe, ahead of 24% destined for north America, and 17% for Asia Pacific.
In line with other investment decisions during the pandemic, much of the money raised was spent locally. In Asia Pacific, investors allocated 87% to their home territory, while in Europe the figure was 86%. In contrast, US investors put 32% towards global investments, and just 43% for their local marketplace.
Funds remain a strong focus for investors. Of the total raised, 60% was destined for investment in non-listed real estate funds, a record amount that points to the continuing strong appetite for such routes to market.
And a second report suggests that the appetite for real estate in Europe is set to substantially increase. Research commissioned by INREV notes that since the global financial crisis, Europe’s non-listed real estate funds market has more than doubled, from EUR88.6bn in 2009 to EUR211bn last year.
The research found that all types of investors are increasing their allocations to real estate, with this unlikely to change in the near future. The demand for investment products has led to a wider range of fund products being created, allowing investors greater opportunities for exposure to specific sectors, or for greater diversification.
Iryna Pylypchuk, director of research and market information at INREV, told Hotel Analyst: “The universe is changing, there is more realisation that real estate is a service.” And she added that the appeal of operational property is broadening: “We no longer see just the specialists going into it.”
She said the industry is reaching “a new level of maturity” and, for an indication of the direction of travel, experience in the north American market is an indicator. There, residential and more operational real estate has grown in popularity “and we already see that happening” in Europe.
“When it comes to the operational side, there are a lot of skills one needs to have.” Pylypchuk pointed to the more developed markets of, for example student housing in Germany and the Netherlands, as examples where a core of expertise has developed, and then migrated into other, allied investment niches of buildings with beds.
“I think we need to also recognise that land is becoming very scarce,” she added. As a result, Pylypchuk noted that investors in London over the last decade have shifted towards more institutional capital, from investors such as sovereign wealth funds. “They are buying to hold.”
Looking ahead, INREV expects to see further growth in diversified, balanced funds to meet investor demand, as well as new vehicles emerging. Some of these are likely to provide new ways to invest in debt, “something we have seen insurance companies put a lot into”.
HA Perspective [by Andrew Sangster]: Investors and commentators have a tendency to look at absolute numbers and reference the current situation with the past. This works fine until underlying conditions change: as long as the denominator remains the same, the numerator alone makes sense.
But current conditions are very different. And the denominator is very different to that which prevailed a decade or so ago or even a few years ago.
In the case of real estate investment if other factors have shifted, critically bond yields, then investors need to consider that they need to start looking beyond the numerator. And of course, bond yields have shifted hugely in the past decade. What matters today is the yield gap.
Towards the end of February this year, there was a flurry of excitement as bond yields began to push upwards. The benchmark US 10–year Treasury more than doubled from its low point in August 2020, moving past 1.6% by the end of March. From the start of 2021, it had climbed 70 basis points.
By early March, many commentators were yelling “inflation”, predicting interest rates to rise rapidly. But the hyperventilation has calmed in the last few months as the yields stopped rising and plateaued at a level matching where it was barely a year earlier and well below the 3% plus it had hit in 2018.
I have no idea if this is a settled position (if I did, dear reader, I would be charging a lot more for my advice). But it seems to me that things are still bouncing around at very low levels. And in such an environment, it seems improbable that property yields will shift much either. If anything, the likely trajectory is still downwards, given the weight of money waiting to be deployed.
All these factors bode well for operational real estate. Investors keen to obtain a positive yield in real terms are having to push up the risk curve, taking positions that expose them to operational risk. These cyclical tailwinds show no signs of abating just yet.