Investor appetite helps real estate turn the corner

In 2023, real estate markets experienced a significant decline in investor appetite and activity levels. Fundraising fell between 40 and 60 percent, transaction volumes decreased by over 60 percent and the number of managers raising capital dropped by approximately 80 percent. Annual growth in assets under management turned negative for the first time in over a decade.

These declines can be attributed to a combination of high inflation rates, monetary policy tightening, bank failures, higher interest rates, equity market volatility and geopolitical uncertainty. These factors led to reduced institutional investor appetite for real estate and challenges in underwriting transactions.

However, the outlook for 2024 stands in stark contrast to 2023. Headline inflation is expected to subside and rate hikes are likely to shift to cuts as inflation falls toward target. With these changes, investors are making efforts to allocate capital to certain segments of the market.

First, we continue to observe investors rotate into more defensive sectors. Examples being an increased appetite for real estate credit, as well as secondaries. As many of the major banks pull back on lending or tighten criteria, several investors are exploring real estate credit strategies’ potential to fill the gaps and take advantage of the higher rate environment. Secondaries also continue to be part of the conversation as investors think through portfolio composition, allocation issues and liquidity requirements. However, differing views regarding valuation opened up a bid-ask spread that has meant transactions to date have proved challenging.

Second, more investors are seeking to deploy capital with a value-add mindset, focusing on asset-level business plans, underpinned by growth and on resilient sectors, such as industrial and residential, enabling them to take asset-level risks to improve the quantity, quality and duration of income.

Finally, an area that has continued, as expected, to rise up the institutional agenda is ESG. There is increased interest in decarbonization, ‘brown-to-green’ investments and energy transition/storage.

Selective investing

The economic picture is clearly improving with falling inflation and an end to the monetary hiking cycle, which should help to revive investor sentiment. Nonetheless, any negative surprise in economic activity or inflation data could destabilize investment markets and lead to further uncertainty in real estate performance and pricing.

With this in mind, investors are likely to deploy capital selectively as they return to investing in real estate. Many are therefore aligning with high-quality managers experienced in investing through cycles in sectors that are either resilient, benefit from longer-term structural or demographic growth drivers, or are likely to reprice to a level where there is perceived opportunity.

Quarterly change in investor sentiment: Q4 2022-Q4 2023

Source: Data and investor sentiment analysis in all charts sourced and compiled solely from Lazard communication with investors