IPE Real Assets May/June 2024: Real estate comeback?

Earlier this year, IFM Investors called on institutional investors to carve out infrastructure from their alternatives portfolios and establish it as a “foundational” asset class. In its Infrastructure Outlook 2024 paper, the global infrastructure fund manager made the case for infrastructure to become a “portfolio cornerstone”, comparable to real estate.

But IFM Investors went further, somewhat contentiously suggesting that infrastructure could do so while also supplanting real estate. “Historically, property has been considered a foundational asset for many institutional investors,” the paper said. “But in light of the seismic changes occurring in commercial property, and both listed and unlisted property’s weaker performance, with higher volatility than unlisted infrastructure, this allows for a discussion as to whether a shift away from commercial property will see infrastructure take its place in portfolios.”

The proposition followed another paper published this year that stated: “The future of the entire real estate asset class – and real estate investment management as a specialist industry – is under threat from broader and more sustainability-aligned real asset or infrastructure typologies.”

The paper, The real estate investment manager of the future, by Andrew Baum, chairman of Newcore Capital and Oxford University professor, and Valentina Shegoyan, founding partner of OPREIM, pointed to the growth of social infrastructure, an area that overlaps with real estate around housing and healthcare property.

As Baum and Shegoyan explore how the traditional real estate asset class needs to evolve to become more operational, they conclude that the “future for real estate investment management may be challenging, but necessity is the mother of invention”.

Mercer is certainly looking to adapt to a world that is moving away from putting real estate, infrastructure and natural resources in separate silos. This year, the investment consultancy hired Michael Brand to take on the new role of head of real assets.

“The thinking now is that we must be responsive to changes in the market and the way in which knowledge-sharing is increasingly important as we move to a next generation of assets approach,” he tells IPE Real Assets. “The boundaries between the three different areas of real assets have almost evaporated.”

The topic of growing competition from infrastructure – both in terms of capital allocations and assets – came up at this year at MIPIM, the annual global real estate convention in Cannes.

But after a period of falling values, limited transactions and moribund fundraising, there are signs that real estate could be about stage a comeback. Much of the talk at MIPIM was about a recovery in transactions in the second half of the year – although people also said the same in 2023. 

But Robert-Jan Foortse, head of European real estate at Dutch pension fund investors APG, has reason to believe this year could, indeed, be different. Foortse, who was also at MIPIM, highlights a key difference between conversations this year and last year. In 2023, people would “come and talk to me in the second half of the year”, he said. This year, investors wanted information so they could actually start work on potential investments.

APG, which is ranked seventh in this year’s Top 150 real estate investors report, is certainly back in the market, so to speak. “We are more active again in the market after basically a standstill,” Foortse tells IPE Real Assets. The situation is helped by the fact that APG has been given a €5bn mandate to invest in affordable housing by its main client, the Netherlands’s largest pension fund, ABP.

The anecdote is in line with this year’s IPE Real Assets investor survey which found that 43% of respondents expect to invest/commit more to real estate this year than they did in 2023. This was the largest group of investors, followed by 41% who expected to invest the same amount and 16% who expected to invest less. This is a reversal of sorts on last year when nearly half (48%) expected to invest and/or commit less relative to the prior to 12 months. 

Some investors, like the New Zealand Superannuation Fund, are looking to build up a greater exposure to real estate after several years of limited activity in the asset class. This year could potentially be an interesting time to do so when many other investors are more constrained. 

However, investing today will not necessarily be comparable to investing in the months and years that followed the last major real estate downturn more than 10 years ago in the aftermath of the global financial crisis. Today, there are new dynamics to factor in, such as climate risk and technology.

As we report in the technology report, the institutional real estate industry needs to start embracing artificial intelligence now, or risk being left behind.