Investors embrace riskier strategies to capture covid opportunities

Global institutions targeted opportunistic funds and broke into new strategies in 2020, but stayed closer to their home markets.

Investors have adopted a risk-on approach to their real estate allocations during the pandemic, according to a survey of 212 global institutions.

Hoping to capitalize on distressed pricing and catch the bottom of the market, 72 percent of respondents favored opportunistic strategies this year, according the 2020 Allocations Monitor compiled by capital advisory firm Hodes Weill & Associates and the Cornell University Baker Program in Real Estate, up from 69 percent last year. Meanwhile, interest in core and value-add strategies fell to five-year lows of 62 and 84 percent, respectively.

Along with this renewed preference for higher-risk strategies, investors were also optimistic about the return prospects for their real estate portfolios, with respondents registering a 5.9 on the 10-point conviction index, the highest average since the Allocations Monitor began in 2013. Similarly, investors are anticipating their greatest collective exposure to the sector to date, with a weighted average allocation of 10.6 percent.

“We’re seeing sentiment rise a bit and a general view that the next several years will be good vintages for deploying capital,” Douglas Weill, founder and co-managing partner of Hodes Weill, told PERE. “Coupled with that, institutions seem to be shifting away from lower returning strategies, core and value-add, to higher return opportunistic with a special focus on distress.”

Investors in the Americas tended to have the highest risk tolerance, with 88 percent of institutions from the region pursuing value-add strategies and 75 percent targeting opportunistic returns, the highest share of each category. Institutions in the Europe, Middle East and Africa region were the most conservative, with core strategies being the most favored among the cohort.

Globally, closed-end private funds remained the investment vehicle of choice, with 82 percent of institutions preferring the structure to access the sector – though that rate is down significantly from 2018’s peak of 93 percent. Open-end funds saw the greatest increase in popularity between 2019 and 2020, rising from 51 percent to 55 percent, and separate accounts continued to gain steam, ticking up from 34 percent to 36 percent.

Weill said part of these shifting preferences can be attributed to a greater focus on niche strategies. And, despite the prevailing narrative that travel restrictions prevented investors from committing capital to managers they had not invested with prior to covid-19, 32 percent said they did.

“Institutions are making changes in their portfolios to look at some newer asset strategies including data centers, life sciences and even logistics,” he said. “In order to get into those asset strategies, many institutions were allocating to new relationships.”

The Americas remained the top destination for global capital, with 86 percent of investors targeting the region. But across the board, investors in all three parts of the world showed a diminished appetite for investing outside their home region. Asia-Pacific saw the biggest year-over-year drop-off in outbound interest, falling from 90 percent to 80 percent.

“It’s still a very big global marketplace for cross-border capital flows and the US is the preferred destination. But what we’re starting to see is institutions shifting to a home country bias. We’re seeing institutions invest in their regions, closer to home where they can underwrite the risk better. Asia is a good example of this, where Asia-based institutions are investing in Asia-based strategies more than they had in previous years.”

Investors of all stripes continued to rollout policies focused on the environment, governance and social issues. Although Asia-Pacific investors made up the smallest pool of survey respondents at just 10 percent, they had the greatest rate of ESG policy adoption at 78 percent. EMEA investors were the most likely to have their ESG preferences play an active role in their investment decisions.

“We’re not only seeing a growth in institutions that have instituted policies, but we’re starting to see those policies influence investment decisions, which is the next big step,” Weill said. “Investors have found that it’s not just a nice thing to do, but it’s actually good from a returns standpoint. Managers that have ESG policies are often better run firms and are better with their execution of investments.”