November has seen a decrease in real estate investor activity, reversing a three-month trend of increased momentum in the sector.
Rising covid-19 cases and a second lockdown in the UK and across other European countries have contributed to increased uncertainty. In addition, the political factors of the US election and ongoing UK-EU trade negotiations may have affected investors’ appetite to return to the market.
It is not only those investors that had been considering a return that have been impacted by the current environment. Investors that were in the process of making commitments are encountering practical difficulties as a result of stricter covid-19 measures. A greater emphasis on ‘work from home’ and renewed, wider reaching, travel-related restrictions have created logistical challenges to conducting necessary onsite due diligence. This has likely contributed to many investors pausing ongoing transactions.
We are witnessing two differing, almost polar opposite approaches taken by those investors which remain active. Firstly, there are those looking at the market through a distressed lens. In contrast, a second group of investors are adopting a more cautious and conservative approach.
Those investors looking to deploy capital through a distressed lens generally seem focused on strategies such as opportunistic equity and credit. They are attracted to sectors that are clearly dislocated, for example, parts of the hospitality industry. These investors will likely look to commit to private real estate funds aimed at those assets which are temporarily impacted by the pandemic, but which have a clearer, more visible path to recovery.
On the other hand, a distinct group of investors are seeking to deploy capital in a more cautious, conservative manner; focusing on the resilience of income, sustainability of cash flow and underlying asset quality. It appears 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.
Despite a temporary lull last month, investor activity should resume, however, as countries emerge from lockdowns, some of the stricter measures are eased and 2021 allocations to real estate are determined. Now that news of successful vaccine trials has emerged, confidence in such a prospect will be higher and that should also lead to an additional boost in activity.