The private real estate industry starts the year in excellent health. INREV’s 2019 Investment Intentions survey, conducted annually with fellow associations ANREV and PREA, shows that half of all global institutional investors plan to continue to increase their allocations to real estate over the next two years. They intend to commit a minimum of €72.4 billion of new capital to the asset class in 2019.
Meanwhile, in 2017, capital inflows into the European market hit record levels at €152.3 billion, while overall annual returns were 9.40 percent, up from 5.99 percent in 2016.
Still, many investors will be cautious. Perhaps the four most pressing challenges they will be thinking about this year are geopolitical uncertainty and the macroeconomic environment, rapidly evolving technology, the changing shape of the industry, and access to real estate.
All these issues are connected and impact one another in some way.
Geopolitical uncertainty and macroeconomic environment
The last three years have seen a shake-up of the global political order. In Europe, the obvious defining example is Brexit. Despite the lack of clarity on the potential outcomes, the real estate industry has taken steps to prepare itself. But with few concrete solutions in sight, there is no room for complacency and plenty of scope for concern. Investors will also be looking ahead to any possible further upheaval following the upcoming European Parliament elections. They will be particularly focused on the potential for additional regulation that could negatively impact the real estate investment industry.
These concerns should be seen within the context of increased global capital flow. Investors outside the region may be less focused on what is essentially a ‘European problem.’
Politics will, of course, influence the course of economics. So, the prospect of a potential downturn, interest rate rises and the approaching late cycle for real estate, will also be playing on investors’ minds during 2019. However, over the past 10 to 15 years, real estate has benefited from significant growth in the quality and volume of data, improved transparency and greater professionalism. This means we are now viewed by increasing numbers of investors as a mature, investible asset class. While predictions are rarely helpful, it is unlikely we will witness a return to the 5 percent allocations to real estate, no matter how the economy performs.
The changing shape of the industry
Another interesting challenge are new entrants to the market. With the coming of age of real estate, it has moved out of the shadows and into the mainstream. No longer viewed as an alternative asset class,real estate has attracted many new players, smaller investors and investors from outside of Europe, and also new capital sources like crowdfunding platforms. This new influx is becoming increasingly influential. Newcomers will challenge the historic dominance of larger investors. A key question around this development is whether changes in the structural make-up of the industry will be seen as a challenge or an opportunity, and whether either will be more significant for investors or for fund managers.
Rapidly evolving technology
Technology’s influence on the real estate investment industry is an inevitability. It has both the potential to bring efficiency gains for investors and also to create new business models. Many investors and managers are still unclear about how to exploit technology’s potential and what foundations to put in place. They also know that unless they are on top of the issue, their businesses could be seriously disrupted. Much could be done to address this challenge if the industry works together and invites experts with experience from other sectors to share their insights and provide help and guidance.
Access to real estate
Gaining the right type of exposure to real estate is the last big issue. There is no shortage of capital in the real estate industry, but this also exacerbates the existing problem of supply of, and demand for, appropriate product. Added to which, investors across the world have shifted their focus even more toward core and value-add strategies, placing further pressure on pricing.