INREV’s survey highlights some important shifts among European institutional investors. Henri Vuong tracks the changes
A plethora of studies, including INREV’s recent Investment Intentions Survey 2015, confirms that there is growing interest in the relative attractiveness of real estate from a range of investors.
The consensus narrative is that, in terms of the risk and return spectrum, real estate looks decidedly compelling, offering investors diversification in a multi-asset portfolio. Much of this mood music is driven by the impact of macroeconomics – especially the continuing downward pressure on bond yields and historically low interest rates. The upshot is that allocations to real estate look to rise to 11.3% in the coming year.
The story unfolds with an interesting picture of the growing diversity in the sources of capital chasing real estate, particularly in terms of investor type and geographic location.
Institutional investors and fund-of-funds managers have indicated they would be allocating a minimum of €42.5bn and €4.6bn respectively to real estate during 2015. And, as some international investors are now starting to add real estate to their portfolios in an attempt to build up their longer-term strategies, demand is more than ever becoming a worldwide phenomenon – over half (59.4%) of investors in Asia will increase allocations to real estate, just under half (44.6%) in Europe will also do so, as well as 36.8% of those in North America.
In this context, it is easy to see how the search for returns (and good quality underlying assets) is becoming increasingly competitive. Against this backdrop comes the emerging trend for some market participants to venture further up the risk curve in the hunt for higher rewards.
One of the striking outtakes from the survey is data that show a seeming rapprochement of investment strategies between certain market participants. Institutional investors and fund-of-funds managers are the clear case in point, with both groups moving closer together in certain important respects.
The data in INREV’s study indicate that both of these groups share similar views on key considerations such as their preferred types of fund structures, reasons for investing in non-listed real estate funds, and the challenges facing the non-listed real estate industry.
Comparing the relative attractiveness of closed-ended funds for investors and for fund-of-funds managers, the statistics come within a hair’s breadth of one another – 73.8% and 73.3% respectively. Similarly, both groups show a liking for structures with small pools of investors (66.2% of investors; 64.7% of fund of funds managers). The characteristics of these structures enable greater input and oversight leading to one obvious interpretation that investors and fund-of-funds managers are equally eager to maintain a degree of control over their investments – hardly surprising in an evermore competitive market environment.
“In the immediate aftermath of the global financial crisis, the preferred option for many investors was to invest in low-risk, low-return strategies – in other words, to move to defensive investments. But with capital chasing yields down to near all-time lows, institutional investors are now looking more favourably at value-added strategies”
Although there is some divergence of views in terms of using non-listed funds to gain exposure to real estate, there is consistency in the rationale for selecting this option. The key reason for both institutional investors and fund-of-funds managers is to gain access to expert management. It is logical to assume that this is part of a shared ambition to secure the diversification benefits of real estate. Both groups also agree that one of the other main reasons for selecting non-listed funds is that they are good vehicles for new entrants, providing access to new sectors and markets.
In general, fund-of-funds managers and investors share a common assessment of the cyclical challenges affecting the non-listed real estate industry. While they may not be ad idem on every single challenge listed in the survey, there is consistency on key issues such as liquidity, which is of particular concern when pre-empting optimum exit strategies. Similarly, both agree that the ability to achieve target returns and the availability of suitable products in current market conditions are notable challenges that will continue to impact the industry.
Taken at face value, the picture is of cohesion, but it’s not an entirely harmonious one. While the survey indicates a general trend for moving up the risk curve, the positioning of investors is clearly distinct from that of their fund-of-funds manager peers.
In the immediate aftermath of the global financial crisis, the preferred option for many investors was to invest in low-risk, low-return strategies – in other words, to move to defensive investments. But with capital chasing yields down to near all-time lows, institutional investors are now looking more favourably at value-added strategies. For the first time, the survey records investors demonstrating a dead equivalence in their preferences for core and value-added strategies.
Fund-of-funds managers, on the other hand, significantly favour value-added funds over core, exhibiting a considerably higher tolerance for risk than that of institutional investors.
There is also a divergence of approaches when it comes to accessing the real estate market. Influenced in part by the current lack of availability of suitable product, fund-of-funds managers are changing what has been a typical behaviour for them for some time by shifting away from non-listed real estate funds. Instead, these participants are adapting the scale-of-aggregation approach that has enabled them to provide access to real estate for smaller investors and using it to increase their allocations to joint ventures and club deals. In this way, they are, to some extent, echoing the behaviour of large investors.
Where will things end up? It might be tempting to conclude that the seeming indications of increasingly convergent strategies suggest a potentially significant structural alteration in the industry. But to promote this hypothesis would be to ignore one important sense-check – the prevailing market conditions.
While interest rates and bond yields remain low, the property cycle will continue to enjoy further injections of capital. On one hand, investors appear more willing to adopt cyclical strategies in the search for yield, but with the memories of the recent downturn still fresh in their minds, they are only doing so cautiously.
Indeed, capital is chasing real estate, but only certain types of real estate. It’s these conditions – rather than any more deliberate attempt on the part of market participants to align their approaches over the long term – that are most likely providing the impetus for a convergence of views on markets, on sectors and, indeed, on investment strategies. The real estate industry does not yet seem poised for wholesale shape shifting.
Henri Vuong is director of research and marketing information, INREV
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