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For institutional investors, it is rotation, rotation, rotation

As the real estate investment landscape shifts, investors are seeking managers that can help them rebalance their portfolios accordingly

When Hines first envisioned its debut US tactical fund, it expected the opportunity set to be driven by covid-related pricing dislocation. It got something much different.

Instead of rescue capital or refinancing, the troubled assets of the pandemic era need physical improvements and operational changes to deal with societal changes and rampant obsolescence.

For Hines, which has spent the past 60 years developing and operating real estate for the biggest tenants and investors around the world, this is squarely in its wheelhouse.

The just-launched Hines US Property Recovery Fund has already secured $590 million against a $1 billion target. Aiming to hold a final close later this year, Hines has a mandate to invest across the 30 biggest US markets in the four main property types plus key niches such as student housing, senior housing, data centers, self-storage and life sciences. A quarter of the fund will be ground-up development with the remainder set aside for updating or repositioning existing assets.

As much as the robust institutional support for such a bold first-time flagship can be attributed to Hines’ track record in the industry, it also speaks to the institutional appetite for value-add and opportunistic strategies that will help them rotate their portfolios away from old assets and outdated allocation mixes.

There are two ways that rotation has been taking place in recent months. The first is a concerted effort to dial up exposure to strong performing property types, which has manifested in substantial portfolio transactions in the logistics and multifamily sectors. The other is through modernizing outdated properties or changing their uses altogether.

Support for both approaches is apparent throughout the PERE Investor Perspectives Study 2022. Value-add vehicles are poised to have the biggest growth this year, with 33 percent of respondents saying they plan to increase exposure to the strategy. Opportunistic vehicles were not far behind, with 26 percent of investors saying they want more of it.

The risk-on sentiment is most pronounced in the normally conservative Asia-Pacific region. In a joint survey, industry groups ANREV, INREV and PREA found that 28 percent of APAC investors will favor opportunistic strategies this year, well above last year’s 18 percent and even 2020’s relatively bullish 21 percent. In Europe, value-add was the strategy of choice for 57 percent of the market, the highest level since 2008.

When it comes to property types or properties investors are seeking access to, there is a clear bifurcation in the market. The real estate sector poised to see the most new investment in 2022 is healthcare, with 37 percent of respondents in PERE’s survey saying they plan to increase their exposure. Data centers, industrial and residential strategies are also in vogue. On the opposite end of the spectrum, office and retail assets are the most likely to be offloaded, with 46 percent of respondents saying they would like to reduce their holdings in those sectors.

Together, these sentiments demonstrate a recognition by institutional investors that changes are needed in the built environment, and a willingness to move up the risk spectrum to do so.

Uncertainty dominated the first year of the pandemic. The second year was defined by an acceleration of long-running trends. The emerging theme for year three is the rotation of institutional portfolios to address the market’s new realities.