Following two years of pandemic-induced lockdowns throughout the world, 2022 was set to be the year societies, economies and markets would open back up, recover and grow.
But the unexpected became a reality, as several market shocks meant these initial expectations set at the start of the year were not met.
Instead, real estate fundraising levels have declined by up to 35 percent in the first nine months of the year, according to PERE data, and many institutional investors remain on the sidelines, with activity levels dropping to 59 percent in October from 71 percent in September, according to our conversations with investors. Nevertheless, investors are making efforts to allocate capital to certain segments of the market that are expected to be defensive in order to take advantage of certain opportunities.
Russia’s invasion of Ukraine in February and the resulting rise in energy prices contributed to the pronounced inflation experienced globally. This prompted many of the world’s central banks to raise interest rates sooner and more aggressively than expected, which has led to a marked increase in financing costs generally. The volatility in equity markets, as they digested the increased cost of capital and resultant denominator effects, combined with significant uncertainty surrounding the macroeconomic climate, led to an overall reduction in institutional investors’ appetite for real estate.
Defensive sectors
Notwithstanding the decline in activity levels, we continue to observe investors rotate to more defensive sectors such as real estate credit and secondaries. As many of the major banks pull back or tighten lending criteria, several investors are exploring real estate credit strategies to fill the gaps and take advantage of the higher rate environment.
An area that has continued rising up the institutional agenda is environmental, social and governance concerns. Investors’ appetite for strategies that embrace and promote sustainability as well as delivering a positive environmental impact has increased throughout 2022. There has also been a broad interest in strategies focusing on decarbonization and “brown-to-green” investments.
While a healthy amount of uncertainty is expected over the next few quarters, we have seen many investors align with high-quality managers that have experience of investing in resilient sectors or are likely to reprice to a level where there is perceived opportunity.
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