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The pandemic has changed our social interactions and reduced what were once common activities – working in the office, going shopping or travelling – to the strictly necessary. Inevitably, the use of real estate has been impacted globally, making investors rethink their strategy as they envisage whether these changes are here to stay or just temporary. In this uncertain time, private capital is approaching the asset class with caution, sticking to well-known managers and paying more attention than ever to track record and investment capacity to secure the best opportunities.
PERE’s Investor Perspectives 2021 Study, which canvassed the opinions of 100 institutions active in private markets, uncovers investors’ real concerns and what their plans are for engaging with the asset class.
Cautious approach to the sector
Investors active in the real estate sector are more likely to hold steady rather than increasing their commitments, following the demand shock seen during the global pandemic. Meanwhile, 15 percent are planning to cut back, the highest percentage of any of the private market asset classes. Despite increased caution, appetite for property is expected to surge post-covid, as sentiment toward real estate performance is more positive going forward than in the past 12 months, the study shows.
Covid shifts sector preferences
The pandemic has altered investors’ sectorial appetite, favoring healthcare and industrial – almost 40 percent of investors polled for the study are planning to up their investment in these two sectors. Meanwhile, investment in residential/multifamily is keeping momentum. In contrast, a reduction of commitments is expected not only in retail and hospitality, but also offices – an asset class that has traditionally formed the basis of most institutional real estate portfolios and now faces increasing scrutiny.
Asia attracts more attention
While most investors polled for the study have similar interest to invest in North America and Western Europe over the next 12 months, Asia-Pacific is proving increasingly popular, with 40 percent of investors eyeing the region with greater interest in 2021. One of the reasons highlighted in these pages for this is the balance the region offers between developed and growth economies, with strong secular consumption growth supporting real estate demand. By contrast, Sub-Saharan Africa, Middle East and North Africa are the regions with the least investor appeal.
High barriers to entry for first-time managers
Amid the current market uncertainty, investors in private real estate continue to be reluctant to invest in first-time funds. Almost half of institutions polled for the study do not back first-time real estate managers. Meanwhile, almost a quarter plan to scale back their investment in new teams.
While the pandemic does not help to form new manager relationships, 52 percent of investors nevertheless would now commit to a new manager’s fund without ever meeting face-to-face.
Stepping up to the climate change challenge
The immediacy of climate change is driving ESG policies and compliance in the industry. The study shows over 40 percent of investors believe managers are taking the risks of climate change seriously enough in their own investment policies and practices, although over 20 percent show some degree of disagreement with this notion. Meanwhile, an increasing number of investors – 38 percent – now incorporate ESG considerations into their due diligence, up from 31 percent in the 2020 study.
More action required on diversity
Investors see diversity as less of a priority when deciding on investments, though. The study shows that 87 percent of investors have not refused an opportunity based on a lack of diversity at the manager level. Furthermore, only 14 percent of investors say evidence of a manager’s diversity and inclusion credentials represents a major part of their due diligence process. Under public scrutiny, there is, however, an expectation for diversity to gain importance across the industry.