Like in many aspects of life, COVID-19 has radically impacted the investment landscape. The unprecedented events of 2020 caused a downward economic spiral, only prevented from becoming endemic by swift central bank action, lowering interest rates to around zero and quantitative easing programmes. One year on and economic recovery tentatively underway, investors are stepping up the hunt for yield and to take advantage of underlying consumer strength and resilient fundamentals.
Against this backdrop, alternative asset classes – from real estate, private equity, hedge funds, venture capital to distressed securities – are rising up the agenda as a means of future proofing and diversifying portfolios. Once viewed as optional in investors’ portfolios, alternatives have become essential, particularly with bond markets experiencing historically low and negative yields and high valuations in the financial markets. Investors are turning to alternative asset classes, for more attractive risk-adjusted returns, with real estate, in particular, considered to have the characteristics and fundamentals to take advantage from this secular shift in capital markets.
According to Savills’ Outlook 2021 Report, there is strong evidence that investors are keeping dry powder ready to be allocated into real estate in 2021. 45% of investors surveyed expect higher real estate investment volumes over the next 12 months compared to the previous 12, 30% think that investment volumes will decrease whereas 25% expect no change. The stable income, low volatility and relatively attractive risk return profile of real estate strategies will help ensure rising demand from both income-seeking investors and those aiming to capitalise on future capital value growth after the current phase of repricing.
Of course, not all asset classes within the real estate world are equal, with some sectors such as logistics surging ahead in the face of the pandemic, with others such as retail taking a much bigger hit. Residential real estate is enjoying a significant shift in fund allocation strategies, with investors attracted to stable cash flows and returns. Rent collections across the private rented residential sector have remained high and turnover rates relatively low. The sector has also benefited from the many government subsidies that have been introduced across Europe to support consumers’ incomes. The view is that even if there is a decline in sales or rental values, it is expected that on average, these are likely to remain relatively stable.
Residential real estate is also favourably driven by population trends, for example younger people increasingly turning to renting, rather than home ownership. New opportunities are also being created by urban centres being transformed into vibrant destinations that offer a wealth of social and cultural experiences, making them desirable places to live and enjoy. There will be a short-lived negative effect on these trends, due to the impact of Covid-19 and the subsequent lockdowns, however, is unlikely set to dramatically shake the long-term vision.
With competition hotting up, Single Family Residential (SFR), a highly successful sub-asset class in the US, is gaining interest – as demonstrated by Blackstone’s recent investment in Tricon Residential. In the EU, 98% of its residential market is existing stock either through MFH or Single Family Residential (SFR); but very few portfolios transact in the secondary market and prices are highly inflated. With no established model for accessing the SFR marketat scale, European investors would be wise to consider this a promising alternative investment strategy.
Investors must equip themselves with the right tools to take advantage of new opportunities such as SFR investment and other types of more operationally intensive real estate. Driven by data, robotic analytics, and human engineering, technology has a newfound confidence which might have otherwise been overlooked as a risk. As a result, new investment pathways have been forged, and increased data points have attracted investors looking to place real estate at the heart of their renewed focus on alternative investments
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