Across all private markets, the multi-faceted covid crisis has arguably weighed heaviest on real estate, both in real terms – through lost tenants and stagnant sales – and on a psychological level, with rampant uncertainties about future demands for and use of rentable space.
With that in mind, it is no surprise the asset class has the lowest near-term enthusiasm among institutions polled for PERE’s Investor Perspective 2021 Study. Only 25 percent of respondents said they would add more real estate in the coming 12 months, compared with between 29 and 45 percent for venture capital, private debt, infrastructure and private equity.
More curious is that most investors expect the asset class to remain depressed for some time, with half of respondents saying it will likely take two years for them to feel positive about real estate again. This was one of several insights unearthed by our Real Estate Landscape Study, a more granular look at the sector to pair with our broader market overview.
Here are five more things we learned from this survey.
- Digital is dominant: One of the big takeaways from 2020 was the rise of niche or alternative property types. Medical office, life science labs, self-storage facilities and student housing all proved to be resilient assets worthy of institutional ownership. But the top of the alternatives heap is clearly data centers and other digital-oriented assets. With more than 70 percent of respondents favoring these properties, they will not be considered alternative for long.
- Better returns are the goal: Despite real estate being heralded as a replacement for treasuries – now more than ever given globally low interest rates – that is not how most investors are approaching it. More than half said they invest in the asset class to boost returns while only 30 percent said it served as a surrogate for fixed-income instruments.
- Lenders are leery: Debt investors are proceeding with caution. Senior debt was the preferred placement in the capital stack, accounting for roughly two-thirds of respondents. Junior and mezzanine positions, the traditional stronghold for real estate debt funds, appealed to a little more than 40 percent of investors, followed by whole loans at roughly a quarter.
- Some things do not change: For real estate’s most embattled property types, the more things change, the more they stay the same. While much was said of grocery-anchored retail last year, investors still favored high-street assets and retail parks. Similarly, covid concerns have not deterred investors from central business districts, as more than half of investors said they preferred city center offices. Medical office was not far behind, though, with more than 40 percent targeting it.
- Funds have faltered: Two-thirds of respondents said direct transactions were their preferred method of investment, besting indirect investments through funds by 10 percentage points. Debt investments were a distant third at a little more than 40 percent. There are many reasons investors opt for direct investing over funds – including management fees and portfolio construction – but at least one theme we heard throughout the pandemic was the aversion to pre-pandemic portfolios, which might have played a role here, too.
There are many elements at play in these findings, including secular shifts in the relevance of property types and investment approaches. But, overall, they demonstrate the concerns investors have about real estate currently and, as a result, the ways they are approaching the asset class more cautiously.
To read the full report, click here.