KPMG’s investor survey results, which it revealed at MIPIM’s RE-Invest this year, suggest that funds might be back. Stefan Pfister looks at the findings
Despite the macroeconomic and geopolitical influences on real estate values, both in capped prices and pockets of price turbulence, global real estate remains an important class of investment assets in that it offers investors the benefits of a degree of inflation protection through index-linked rental incomes, some portfolio diversification across economies, and a variety of strategic investment paths, depending on the investor’s attitude to risk and ambition for return.
Overall, the 2013 results demonstrate a continuing pattern for real estate investment from last year’s survey – a blend of conservative investment behaviour in core real estate, but increasingly coupled with opportunistic or riskier behaviour as confidence returns to mature markets and transparency improves in emerging markets. Diversification, in terms of risk, volatility and returns, is key.
What is surprising to note is the potential step-change in how to invest, with respondents identifying pooled funds as ‘the most attractive vehicle in today’s market’ (33%), level with direct holdings/separate accounts and ahead of club deals and joint ventures (25%).
Currently, only 18% of respondents employ pooled funds, with 41% employing direct holdings/separate accounts and 35% employing club deals/joint ventures in their real estate portfolios, implying a change of approach to future investment and a reversal of last year’s results which showed investors favouring club deals/joint ventures.
While core real estate remains essential to the investment strategy of many (29%), it is now outshone by opportunistic strategies (32%), perhaps unsurprising given the level of competition for core assets and pressure on returns. We are also seeing continued interest (21%) in real estate debt as an investment in its own right, albeit down from last year’s 28% – and while the structures might not be in place to manage debt investments as simply as the underlying assets, undoubtedly there is a ready market, given the uncertainties and difficulties in the banking and related financial markets.
With respondents split 50/50 over whether debt investments offer better risk-adjusted returns than traditional real estate (equity) there is greater consensus (62%) that ‘debt strategies will become a much more significant part of institutional real estate portfolios in the future’. With investors favouring mezzanine debt (40%) over senior (33%) and whole loans (27%), the results indicate a preference for managing risk – particularly in the event of debtor wind-up. Perhaps we will also see more complex debt instruments appearing in the real estate markets now that we know there is growing appetite.
We are seeing distinct differences in the approach taken by investors to regional investment, where more cautious investors stick to established markets, such as London and New York, and those with a less risk-averse outlook showing increasing interest in ascendant economies, such as Shanghai and Singapore. We expect cities in emerging economies – for example, São Paulo and Manila – to feature in future surveys as the transparency of the real estate opportunities in those economies increases.
Stefan Pfister is partner and European head of real estate at KPMG