Reviewing the regional split of investors in this year’s PERE Global Investor 100 ranking, on the surface, little appears to have changed.
There are 39 North American investors, the same number as last year. The only representational change saw Europe cede ground to Asia, with 34 European institutions represented versus 37 in 2022, while Asian investors grew from 21 to 24.
But dig a little deeper and you will see European investors have given up significantly more ground on the ranking. Indeed, 25 European investors have slid down the table from their positions last year. Some fell by more than 30 places, others by a single place. Whether great or small, a fall in position is the biggest single takeaway from this year’s list.
Stung by core values
A long-standing tendency to invest in lower risk and return real estate, coupled with an economic environment stunned by rapidly escalating inflation and rising interest rates, is one reason for this, explains Matt Hershey, partner at New York-based capital advisory firm Hodes Weill.
“European investors, by and large, are more risk averse,” he says. “As such, they are generally more core in nature.”
He says given that European real estate tends to trade at lower yields than in other regions, “a move in interest rates was always likely to impact [European investors] more.”
The impact extends beyond the value of assets held by European investors to their ability to add more to their holdings. This is substantiated by broker CBRE’s Global Real Estate Capital Flows H1 2023 report, which reveals cross-regional capital flows globally totaled $30.5 billion in the first half of the year, down 52 percent from the same period in 2022.
While the research does not include local investments by European investors, CBRE recorded $2.07 billion of outbound investing to other regions in the first half, down from $5.28 billion in H1 2022, indicative of a significant reduction in activity. North America received $1.81 billion in capital flows from Europe, down from $4.92 billion in the first half of last year; Asia-Pacific, meanwhile, attracted just $260 million in investment from Europe, versus $370 million in H1 2022.
“We’re certainly seeing a slowdown in new allocations from European investors,” said one Singapore-based consultant who declined to be named. “And selective sales.”
The latter sentiment is shared at Bouwinvest Real Estate Investors, a manager of Dutch pension money. While not featured on the GI 100 ranking, this European investor is spending considerable time managing dispositions, according to Stephen Tross, its chief investment officer of international investments. Indeed, the investor’s exits reached a five-year peak of €540 million in 2022, of which €286 million was in international real estate, according to its annual report.
“Sometimes, a good divestment opportunity is as important for the performance of your portfolio as finding the right investment opportunities,” he tells PERE. “Finding the right timing for the divestments goes hand in hand with investments, of course.”
Tross points to the denominator effect as one key reason why selling is important in order to make further acquisitions in the current climate.
With portfolio rebalancing activities underway, there are few indicators of a near-term reversal in direction for European investors on PERE’s GI 100 ranking.
According to the annual Investment Intentions Survey 2023 by INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, only European investors reduced their target allocations, declining from an average of 10.8 percent last year to 10.5 percent in 2023. North American and Asian investors, meanwhile, maintained higher target allocations than actual allocations.
“European investors are, on average, overallocated to real estate,” the report said, adding: “The denominator effect was mentioned by approximately 70 percent of the respondents as one of the main issues impacting their real estate decisions for 2023.”
INREV expected the denominator impact, however, to be short lived as property valuations are marked down, a sentiment echoed by Hershey. He says: “I think a lot of the write-downs have come through in Europe. The UK has been most progressive in taking theirs. Continental Europe has been a little slower but, overall, a good amount has already come.”
Such write-downs could prompt a return to investing, however, which could mean different positioning for European investors on the GI 100 next year.