Why real estate?
With LP target allocations increasing 160bps since 2013(1) and a total of €3.2trillion(2) in global assets under management (AUM), real estate is one of the largest alternative asset classes. Investors have been drawn by its low correlation with broader capital markets, the perception of equity-like returns and relatively high cash yields. Equally, the opportunity to charge comparatively high fees will appeal to many investment managers who are experiencing compression in other areas of their business.
Trends and investment themes
Historically, real estate was perceived as homogenous sector, with markets broadly moving in the same direction. Over the past decade, however, a creeping separation between asset classes has emerged due to structural shifts, including the rise of ecommerce and the decline of the high street. The COVID-19 crisis has accelerated such divergence, forcing consumers online and office workers to stay at home, increasing their reliance on digital infrastructure.
Investors with a higher risk appetite see an opportunity to capitalise on the distress caused by the global pandemic. These businesses are monitoring hospitality and retail assets as well as the public markets. The common view is that hospitality will win out over retail due to the structural shift towards ecommerce.
For more conservative businesses who favour predictable cashflows, residential and logistics assets have been flavour of the month. Logistics assets are particularly sought after as the demand for ecommerce grows. Whilst the structural underpinning for this sector seems strong, the volume of capital chasing these assets has priced some investors out of the market. Sceptics also point to obsolescence risk as these assets are often in out-of-town locations and would be hard to convert for an alternative use. In contrast, residential assets tend to be in better locations with higher land values, leading some to view them as a safer bet.
Recent events have brought to the fore sectors which had been on the periphery for several years, namely data centers and life sciences. A number of institutional investors are focusing on these emerging asset classes and intend to deploy significant volumes of capital in these areas. The main challenge here seems to be finding a high-quality operating partner as both asset classes are relatively intensive in this respect.
Western Europe has been the core region of emphasis for most investors, with some more intrepid groups heading east to countries such as Poland, seeking to capitalise on comparatively high rates of economic growth.
In recent years, the Nordics have come into focus. Investors are attracted to the region’s economic transparency, prosperity and political stability. These markets are well covered by domestic capital, so competition has historically been fierce. There has, however, been something of a slowdown in the flow of local capital targeting real estate in recent years, opening the market to international investors. Recent transactions in this region include Kildare’s acquisition of Technopolis and Blackstone’s acquisition of D. Carnegie.
Coming out of COVID-19, southern Europe represents a potentially exciting opportunity for investors with a higher risk appetite seeking beleaguered hospitality assets.
Those wishing to enter the real estate investment arena have two options at their disposal: either build a team organically or source a team move/buy out an existing business. Both models have proven successful over recent years with some managers opting for a blended approach. For example, BlackRock supplemented their core real estate offering with the acquisition of MGPA in 2013 and Invesco expanded their real estate coverage with the acquisition of Doughty Hanson’s real estate business in 2014.
Recent years have seen a slew of independent real estate General Partners (GPs) being acquired either wholly or partially by larger investors. Brockton Capital was sold to Alony Hetz Property and Investment, Rockspring Property Investment Managers was acquired by Patrizia, Resolution Property was sold to Fosun and Tristan Capital divested a substantial minority stake to Candriam.
In contrast, Pictet chose to build their business organically in 2018, hiring industry heavyweights from across Europe for their real estate debut. They premiered alongside BC Partners who launched their first real estate vehicle in the same year and Ardian who preceded them in 2016 with a decentralised European team hired from various investment and advisory houses.
The vicissitudes caused by COVID-19 have shifted the hiring landscape. Some private equity investors have seen the value of their carry wiped out or heavily discounted, presenting a unique opportunity to prise people out of organisations where they would typically be too tied in to leave. On the institutional side, there has been ample coverage of the redemptions suffered by open-ended retail funds leading to a feeling of unease in many of these organisations. Equally, certain institutions have been subject to corporate restructurings which have shrunk their real estate business considerably.
Ultimately, for those with an appetite for alternative markets, real estate presents a compelling opportunity from both an investment and human capital perspective.
(1) Allocations Monitor survey from Hodes Weill & Associates and the Cornell University Baker Program in Real Estate.
(2) Fund Manager Survey 2020, published by ANREV, INREV and NCREIF.