Institutional investors show strong appetite for real estate despite Covid-19 pandemic
Institutional investors plan to invest a minimum of EUR55.4 billion in global real estate in 2021, with a strong emphasis on Europe, according to the 2021 Investment Intentions survey published today by ANREV, INREV and PREA.
Funds of funds expect to invest a further EUR9.2 billion into global real estate this year, bringing the total expected minimum new capital to EUR64.6 billion.
Of the expected EUR55.4 billion of investments, nearly half (EUR26.5 billion) will be committed to European real estate compared with EUR17.5 billion for North America and EUR9.7 billion for Asia Pacific, with the remaining EUR1.7 billion targeting Americas ex US and Africa. These results might be partially skewed due to European respondents accounting for a large share of the sample size.
Across all three global regions, investors cited diversification benefits of real estate in a multi-asset portfolio as one of the most important factors in their decision to invest in the asset class. All regions recorded inflation hedging as the least important factor influencing their decision to invest.
Despite the turbulence caused by the Covid-19 pandemic in 2020, the majority of respondents, regardless of investor domicile and regional strategy, said it would not alter their future investment plans. Almost 80 per cent of all investors targeting Europe reported no change in their investment plans, with North American investors looking to invest in Europe reporting an overall marginal increase in allocations – perhaps sensing the chance to enhance returns on the back of pandemic-induced opportunities in niche sectors and / or markets. Across all investment destinations globally (except the Americas excluding the US and Africa) more investors reported plans to increase allocations to real estate than to reduce them because of Covid-19.
Average current real estate allocations globally stand at 9.3 per cent versus an average target of 10.0 per cent, suggesting that institutional capital should continue to flow into the asset class.
Current actual and target allocations were highest for investors domiciled in North America at 10.4 per cent and 11.4 per cent on average, respectively. For European investors, the gap between average actual and target allocations was the narrowest at 9.0 per cent and 9.3 per cent. Investors based in Asia Pacific had the lowest average actual allocations at 8.0 per cent and the widest spread to their average target allocations of 9.7 per cent.
For investors domiciled in Europe a far greater proportion (46 per cent) expects allocations to real estate to increase over the next two years than anticipates a decrease (8 per cent).
As in previous years, when deploying new investment capital in the European region most investors selected non-listed real estate funds and private REITs as their preferred route to market. The second most preferred route, based on an expected increase in allocations, are joint ventures and club deals.
Also noteworthy is the expected increase in allocation to non-listed real estate debt. In 2021 it ranked third on a weighted real estate AUM basis, while it was only in fifth place in 2020.
Core continues to dominate as the preferred investment style globally, accounting for around 83 per cent of the average institutional investment portfolio. Value added and opportunistic strategies represent 11 per cent and 6 per cent, respectively. Investors domiciled in North America have the greatest risk appetite, with 14 per cent of their portfolios made up of value added and 12 per cent of opportunistic investments. However, three quarters of their portfolios are still focused on core investments.
Looking at Europe as an investment destination, the latest results show a notable shift to a risk-off approach, with half of all respondents opting for core strategies – the highest level since 2015. The rise of core in this region comes at the expense of opportunistic strategies, preference for which fell from 20 per cent last year to 13 per cent in 2021. Preference for value added slid from 43 per cent to 37 per cent over the same period.
Globally, real estate portfolios exhibit significant home bias, with European investors keeping over two thirds of their portfolios in their own region. In 2021 European investors are expected to invest 62 per cent of new capital at home. Asia Pacific investors, on the other hand, plan to allocate 69 per cent of new capital to their own region while strongly favouring North America with a 22 per cent allocation, compared with only 9 per cent destined for Europe. North American investors are set for the highest home bias in 2021 at 73 per cent, with the remainder almost equally split for deployment in Asia Pacific and Europe.
For investors seeking opportunities in Europe over the next two years, Germany and France strengthened their positions as preferred destinations; and the Netherlands saw an uptick with investor preferences for this country rising from 37.3 per cent last year to 51.6 per cent in the current report. Germany remains the most preferred country in Europe among investors, while France overtook the UK and is now in a comfortable second place. The UK, which was the top-ranked destination in 2017 and 2018 and second in 2019 and 2020, slid into third position this year.
Investors from Asia Pacific and Europe are particularly interested in Germany and France, while their counterparts from North America show a strong preference for the UK. North American investors typically have a higher appetite for risk compared with their European and Asia Pacific counterparts, especially when investing internationally, and currently the UK offers more ways to enhance returns with distressed or repositioning opportunities.
Sector allocations and preferences
At the global level, the office sector takes up the largest allocations from investors across all three regions at 34 per cent, followed by residential (23 per cent), retail (20 per cent) and industrial/logistics (12 per cent). Other ‘niche’ sectors account for 11 per cent of allocations across global portfolios.
Looking forward at a European regional level, offices, industrial/logistics and residential tie for the most preferred slot for new investments in 2021. Unsurprisingly, retail’s fall from favour continues and the sector has been overtaken in preference by development. On the other hand, residential shows significant gains becoming the joint first sector preference for investors. One hundred percent of funds of funds selected residential as their preferred sector for investment.
One marked shift in attitude toward combined country and sector preferences is the absence of the UK from the top 10, most probably due to the on-going uncertainty caused by the dual impact of the Covid-19 pandemic and Brexit. Instead, investors express a strong preference for Germany industrial/logistics, Germany office, France office and France industrial/logistics. Investors also have a considerable appetite for Germany residential and France residential.
So far as city and sector combinations are concerned, apart from Paris offices the top four preferred slots include industrial/logistics in Berlin, Paris and London, exemplifying the increased appetite for the sector. Despite strong appetite for residential assets, only Paris residential made it into the top 10 list of investor preferences, while the sector was featured three times in the country and sector combinations.
Iryna Pylypchuk, INREV’s Director of Research and Market Information, says: "This year’s Investment Intentions suggests continuing robust investor appetite for real estate, with Europe and the diversity it offers firmly in sight and somewhat of a sweet spot for both local, regional and cross-regional capital. Real estate’s role in a multi-asset portfolio is the key determinant to invest in the asset class. With target allocations maintained or even increased in some cases, there is clearly room for more capital to find its way into the asset class. Non-listed funds are expected to see most of the new capital allocations in Europe, but an increase in allocations to joint ventures and club deals, especially by the larger investors, makes for an interesting period of activity ahead. This is very much in line with the emerging trend for a more operational style of investment and risk-off strategies, as investors seek to take greater control."