Real estate investors set to move up the risk curve in 2020, says new survey

Institutional investors have signalled a greater appetite for risk in the year ahead, according to the global Investment Intentions Survey 2020, published today by INREV, ANREV and PREA. 

Twenty per cent of global investors investing in Europe – including a majority of those domiciled in the region – cited ‘opportunity’ as their preferred investment style. This is up from 9.8 per cent last year and marks the highest percentage since 2009.  

 
These results reflect investors’ ongoing search for alternative ways to deploy capital and drive returns, in the face of continued low interest rates and low yields. They also build on a continuing trend, with investors having on average allocated more than 12 per cent of their total real estate AUM to opportunity strategies in 2019 – an increase of almost 50 per cent compared with the previous year. 
 
North American investors led the charge, increasing allocations to opportunity style investments from 15 per cent in 2019 to 37 per cent. Investors from Asia Pacific upweighted their exposure to opportunity from 3.3 per cent to 7.2 per cent as well as raising their allocations to value added strategies from 6 per cent to 9 per cent, over the same period. European investors slightly reduced allocations to opportunity from 5.6 per cent to 5.4 per cent, focusing on core instead.
  
The survey indicates that a total of EUR98.1 billion of new capital is expected to be invested in real estate globally in 2020. The lion’s share (61 per cent) will come from investors in Europe, with just under 20 per cent each from investors in North America and Asia Pacific.  
 
The contribution from European investors is expected to rise from EUR32.5 billion in 2019 to an estimated EUR54.1 billion over the next two years. 
During this period, Europe is expected to attract significant volumes of capital amounting to EUR39.8 billion compared with EUR28.3 billion destined for Asia Pacific and EUR19.4 billion targeted at North America. 
 
Anticipated new investments in non-listed real estate vehicles globally, specifically, are set to rise with a substantial volume of capital coming from European investors who plan to hike their commitments from EUR17.6 billion in 2019 to EUR20.8 billion in 2020.  
 
So far as European non-listed real estate funds are concerned, more than 60 per cent of investors from Asia Pacific expect to increase their allocations in the coming 24 months; whereas European investors plan to reduce their new investments from EUR13.7 billion last year to EUR10.0 billion in the year ahead.
  
Investors active in Europe retain a preference for Germany (67 per cent), the UK (63 per cent) and France (57 per cent). For funds of funds the top three country preferences are Germany, France and the Netherlands all in equal first position selected by 90 per cent of the cohort.  
 
Offices top the list of preferred sectors for investors with industrial / logistics and residential ranked equal second. Funds of funds rate office, industrial / logistics and residential equally at 80 per cent. Compared with 2019, investors from Asia Pacific, Europe and North America all show a substantially increased preference for the European industrial / logistics sector.
 
The poor performance of retail over recent years seems to have impacted its ranking. European investors have signalled retail as their fourth preferred sector at 50 per cent. Investors in North America also rate it fourth at 43 per cent, as do those in Asia Pacific (31.3 per cent). Only 10 per cent of funds of funds express a preference for the retail sector. 
 
The four top combined country/sector preferences for investors are France office, Germany office, Germany industrial/logistics, and UK office. For the first time since 2012, UK retail failed to make the top 10 preferred combinations for investors. 
 
 
Investors in all three main regions share a common belief that ‘access to expert management’ is the main motivation for investing in non-listed real estate funds. However, the most significant barrier varies according to domicile. For investors in Europe it is ‘availability of suitable product’ (50 per cent); North American investors have identified ‘currency risk exposure’ (64 per cent); and their counterparts in Asia Pacific see ‘transparency and market information’ (64.3 per cent) as the biggest challenge.
 
Lonneke Löwik, INREV’s CEO, says: ‘These findings point to a curious mix of investor sentiment. The continued lower interest rate environment looks like being an important driver for 2020, as investors seek returns from real assets including real estate; and the shortage of core assets is driving investors further up the risk curve. Interestingly, while investors in North America have long had an appetite for opportunity style investments, their counterparts in Asia Pacific who have tended to be more cautious in the past, are also now slowly moving up the risk curve. As global capital continues to flow, off-shore investors are increasingly looking for local partners, further stimulating the focus on non-listed real estate.’