What is striking from the results is the complete lack of consensus when investors are presented with the below statements
Whether a question of continued commitment to core in the face of tightening yield; or whether Europe’s peripheral economies can deliver the real estate fundamentals to support investment appetite, or whether the traditional fund model is sustainable.
Areas where there are signs of emerging consensus include: the need to shift up the risk-return curve to secure investment opportunities and the impact of political and regulatory changes.
More than half (52%) of respondents believe their investment strategies are protected from political conflict; 69% expect they will need to review their tax structures in the face of increasing reputational and regulatory pressure. What is apparent from these results is that our respondents are keeping all options open and are evolving into more flexible and agile organisations to meet the emerging challenges that the real estate industry throws at them.
The traditional real estate fund model is unsustainable in the face of increasing capital allocations by more adaptable investors
While the fund model receives a vote of confidence from 44% of our respondents, this is less comforting when compared with the 60% of respondents that currently utilise a fund vehicle in some format. What is clear is that our funds and fund managers are facing an increasing volume of challenges (demand for different products, margin pressure, regulatory changes just to name a few) and need to adapt to the ‘new normal’. However, they also are a great source of knowledge and experience and are finding new ways to put this to work.
I will look for value in higher risk (compared with my current risk profile) asset classes and geographies as prime is too expensive
Again these results demonstrate the increased adaptability that is becoming key to performing at the institutional end of the real estate investment market. It also shows some caution being exercised as they consider their options. Again there is little correlation between the type of investor and the approach to this potential strategy.
I will continue to invest in prime assets providing income security even if expensive
While the spread is largely consistent with the breadth of primary investment strategies deployed by our respondents, the commitment to the prime/core strategy is significantly lower than the 75% discussed earlier. This would indicate the potential for further shifts to more opportunistic investments or other alternatives such as infrastructure in the foreseeable future.
Europe’s peripheral economies (Ireland, Spain, Italy and Portugal) lack the real estate fundamentals to support the current appetite for investment opportunities
While potentially concerning that the perception surrounding these real estate fundamentals is not more aligned across our respondents, we believe this is a further sign of the increasingly opportunistic approach taken by many of these investors. With few European markets out of bounds, investors appear to be confident that opportunities can be found.
Prime cities (London, Paris, NewYork, Hong Kong, Singapore) cannot avoid a bubble given the wall of capital targeting investment opportunities
While skewed in favour of general agreement, again there is a significant proportion that are not concerned about bubbles. Yet again, the respondents opting for ‘disagree’ represent a cross-section of our respondent base.
Investment opportunities in core cities will decline as the large global investors take longer hold periods
Comparing these results to the target hold periods considered earlier, there is a clear correlation between the two sets of results with the volume of ‘disagrees’ equalling the volume of respondents holding assets for five to 10 years. The increasing trend towards opportunistic or mixed strategies is likely to lead to more flexible investment plans for particular investments, enabling realisation of capital growth if the price is right.
Political conflict is having an increasing impact on our investment strategy
Given the extent of political conflict, prevailing one might have expected a rather different result. However, a core strategy hinges on security and stability and therefore relative to the wider world the exposure of our respondents to political uncertainty is indeed limited.
We will need to review our tax structure in the face of increasing reputational and regulatory pressure
As the OECD continues to work on its base erosion and profit-shifting project, and governments around the world place increasing focus on their country’s tax, the tax and regulatory landscape is becoming increasingly complex. The complexity is likely to correlate with the geographical spread of investments and investors’ tax status. Our respondents include sovereign wealth funds, pension funds and insurance funds among others and it is arguable that a number of these will have already engaged with the new regulatory landscapes. The tax transparent status of the SWFs is also likely to limit the impact of the closing of potential loop holes compared with other traditional investors.