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Lazard: Investment appetite is returning to a different landscape

As covid-19 restrictions ease, investors are becoming more active. But the assets they want are changing, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

As we move into the second half of 2021, institutional investors’ appetite to deploy capital into real estate strategies is gradually returning to pre-pandemic levels. The vaccine rollout in many jurisdictions has led to an easing of restrictions and employees are returning to offices, albeit while embracing hybrid working models.

James Jacobs

International travel is beginning to open up, too, aided by the introduction of vaccine certificates, and economic growth is exceeding expectations of many forecasts. As a result, there appears to be growing confidence among investors to deploy capital.

As institutional appetite gradually returns, investors remain cautiously optimistic about the future. In an environment where interest rates remain low, we continue to observe a rotation from fixed income investments into yielding assets. This should benefit the demand for real estate exposure as capital continues to flow into the sector.

A more significant driver of capital flows has been the reallocation within institutions’ real estate portfolios. Sectors that have traditionally been overweight, such as retail and office investments, have fallen out of favor. Instead, the focus has been on assets that showed better resilience during the pandemic, such as industrial and residential. It is these sectors where many investors are currently underexposed and where they may now seek to deploy capital.

Over the summer, as the economy and life began to adopt to a new normal, the way in which investors are deploying capital has shifted slightly. There has been an uptick in investor appetite for certain sectors that were less popular at the onset of the pandemic. For example, the office market now looks to be attracting more interest from investors than this time last year.

This trend is likely to continue if we return, as is currently anticipated, to the office in a more concerted way after the summer. Notwithstanding a return to the workplace, demand for office strategies will also likely be driven by the way tenants use space in the new world, as well as ESG considerations which are increasingly an important topic.

The pandemic has changed investor preferences and accelerated trends already prevalent prior to covid-19. However, as markets normalize, investor demand looks set to return for certain sectors previously out of favor, provided the real estate continues to serve a purpose.