LOOK AHEAD 2018: ‘Risk off’ with selective focus on growth areas  

The past 12 months have seen broad-based economic recovery in most major markets, despite a backdrop of political uncertainty in Europe and further afield. With signs of interest rate increases on the horizon and the expected tapering of monetary stimulus there is a growing feeling that the real estate market is in the late stage of its cycle, creating risk and uncertainty for managers and investors alike.

Furthermore, with several years of strong fundraising momentum behind us, increasing institutional allocations to real estate and significant dry power for new investments, it is becoming increasingly difficult for managers to find value in established markets.

I therefore believe that the current macro and pricing environment means investors will be seeking to minimise risk through a flatter growth period for the real estate markets, through identifying strategies that may offer stabilized income, seed portfolios, and/or shorter durations in the near-term as well as benefitting from longer-term secular trends. These are:

1. Continental European core-plus and value-add opportunities

As the notable increase in economic growth across Europe continues into the new year, we believe that core-plus and value-add strategies across the continent will remain a focus for investors. As the shape of any potential Brexit deal is still unclear, it is likely that cities with large financial centres, such as Paris, Frankfurt, Dublin and Amsterdam will benefit most from the continued uncertainty over the UK’s position as a leading global financial centre.  Investors which already have broad allocations to pan-European and diversified property may consider complementing their portfolios with country- and sector-specific strategies executed by managers which can demonstrate a unique ability to source deals in target markets and a proven capability to unlock value through asset management initiatives.

2. Debt and credit-backed strategies

Debt strategies have the benefit of offering investors current income whilst also providing additional comfort in non-rising markets through a protected position the capital stack. As institutional real estate and private debt allocations form a larger part of investors’ portfolios, performing debt strategies may act as a diversifier as well as cushioning adverse movements in equity investments. Managers with the ability to identify and underwrite the credit of long-lease and sale and leaseback opportunities can also provide interesting yielding opportunities for equity investors throughout the cycle.

3. Secondary and recapitalization opportunities

The ability to buy and sell in the secondaries market continues to grow in importance for many investors and the traditional model of trading passive investor fund commitments remains the largest part of this market. However, more active strategies are also evolving whereby investors cooperate with underlying managers through recapitalizing often underfunded portfolios to enable the completion of value-enhancing initiatives, whilst simultaneously providing liquidity to existing investors where required.  By deploying capital in this way, investors may also benefit from access to mature assets at a discount to NAV, shorter investment durations, immediate income and portfolio diversification

4. Strategies that benefit from demographic and secular trends

Technological advances, urbanization, the rise of the sharing economy, a changing retail environment and evolving demographics all provide substantial investment opportunities to investors which can successfully anticipate the impact these trends will have on how society uses and experiences real estate. A number of operators and managers will find success developing products and strategies that benefit from these drivers, including ‘live-work-play’ and experiential retail concepts in city centres, strategically positioned distribution hubs supporting e-commerce operations and senior- and assisted-living services for areas with ageing populations. Many of these areas remain underserved by established managers, leaving opportunity for new players to emerge and thrive.