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Investors are adopting two approaches to reallocation

Institutional investors are opting for either a cautious or opportunistic risk and return profile as they reallocate their real estate portfolios between various sectors, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

Jacobs: reallocation between sectors is a major trend now

Institutional investors continue to increase allocations to real estate, predominantly to search for yield as a fixed income alternative. As they do so, pricing is distorting and returns are augmented.

Within that bigger picture is another, equally important trend: that of reallocation between the various sectors.

Two different approaches are being taken. Certain investors are approaching the market more cautiously. In contrast, a second group of investors are looking to deploy capital through a distressed lens.

Those investors taking a cautious approach are attracted to sectors that exhibit growth in tenant demand, favorable long-term demographic trends and a certain level of resilience during the on-going covid-19 pandemic. These investors have three priorities: larger, deeper and more liquid markets; core or core-plus assets; and more resilient property types such as industrial and residential assets.

On the other hand, investors looking to deploy capital after viewing the market through a distressed lens are generally focused on strategies such as opportunistic equity and credit. These investors are attracted to sectors that are clearly dislocated, such as parts of the hospitality industry.

The investors taking this approach will look to commit to private real estate funds aimed at those assets that are temporarily impacted by the pandemic, but have a clearer, more visible path to recovery.