The unprecedented global health crisis has made investors cautious of putting money to work in private real estate. That caution is reflected in PERE’s Investor Perspectives 2021 Study. While 35 percent of investors with existing exposure to property want to maintain the size of their commitment in 2021, the study found 15 percent plan to invest less capital, up from 9 percent in the 2020 study. Still, a quarter of polled investors plan to increase allocations this year, although this is down from 35 percent last year.
“Covid has had a major impact, there’s no question. It’s been a demand shock across the globe,” says Kiran Patel, deputy chief executive and global CIO at Savills Investment Management.
“But we’re finding the appetite for investing in real estate greater post this covid shock. Once the vaccines work their way through the system, maybe from the summer onward, we’ll go back to some normality and those sectors which have been hard hit, like retail or hospitality, will see a resurgence of demand. There’s pent up consumer demand with cash savings.”
Interestingly, 34 percent of investors are under allocated to the asset class, which suggests commitments could pick up going forward, as investors continue to seek yield in a low-rate environment.
“I’m not surprised that sentiment has been affected, but in the longer run investors’ demand won’t be affected. We’ve seen a continued strong demand for real assets, and real estate more specifically, as we continue to see a high and favorable risk-return,” says Patrick Kanters, managing director of global real assets at APG Asset Management.
In a challenging 2020, real estate performance had mixed fortunes. The study found 47 percent of respondents who invested in private real estate had met or exceeded their benchmarks, but the asset class fell below benchmark for 27 percent – up from only 7 percent in last year’s study. Sentiment is more positive going forward, though. The study shows that 57 percent of investors expect real estate to meet or exceed benchmarks in the next 12 months.
“There are definitely pockets that look poised to outperform because of positive momentum, such as logistics, data centers and some new-build residential,” says Bill Schwab, founding partner of LCI Real Estate Investments and former real estate head of sovereign wealth fund Abu Dhabi Investment Authority. “Other sectors, like retail, are price depressed, and that could be very interesting from a contrarian investment perspective.”
While most investors are holding steady on their strategy, many are inclined to take on more risk for higher returns, with 26 percent and 33 percent of investors keen to invest more in value-add and opportunistic strategies, respectively. “If you wanted core returns five years ago, you could have 5 to 7 percent IRR. Today, for the same risk, returns are 3 to 4 percent,” says Patel. “To deliver returns investors are going up the risk spectrum, taking value-add and opportunistic risk.”
When it comes to geographies, Asia-Pacific is proving popular, with 40 percent of investors expecting to have greater interest in the region this year. “Asia-Pacific offers an ideal balance between developed economies and growth economies, with strong secular consumption growth supporting stable real estate demand. Negative real risk-free rates provide continued support for real estate yields,” says Rushabh Desai, chief executive, Asia-Pacific at Allianz Real Estate, the captive investment and asset manager of the world’s biggest insurance company, Allianz.
The three most significant threats to performance currently on investors’ minds are a recession in core markets, cited by 83 percent of investors; the covid-19 outbreak, which is a concern for 68 percent; and extreme market valuations, a worry for 51 percent.
Patel acknowledges that major business interruption brought about by the pandemic should have a negative impact on core real estate. However, the lowering of interest rates, coupled with help from governments, has provided some support in the core space, which has seen “minimal falls” in pricing, he says. “The full impact of covid, though, is yet to work through. Unemployment rises lag, government schemes have a finite life and so valuations are not fully reflective of all the bad news. On saying this, I don’t expect extreme valuation movements unless you are in the very hard-hit areas of business interruption or failure, where the distress of covid impact is the greatest.”
Despite setbacks, market participants canvased by PERE are positive on real estate’s prospects going forward, which is a key difference from the previous downturn. “Unlike the global financial crisis of 2007-08, we don’t have huge indebtedness. Real estate players have been very prudent with debt, with more curtailed LTVs. At the same time, we haven’t overbuilt,” Patel says.
Investors also remain more selective than ever, with stronger discipline on pricing given the current uncertainty and potential volatility in the market.