Cross-border global real estate investment volumes have halved since the outbreak of the pandemic in early 2020, but the world’s largest advisors are predicting that recovery is on the cards for 2022 and that European investors will be heading the charge. More global capital is targeting real estate now than ever before as cross-asset investors seek diversification from perceived highly priced fixed income and equity markets and a hedge against growing inflation expectations that bricks and mortar can provide.
Real estate is one of the big winners in the global pandemic as investors have increasingly focused these past two years on the question of where it is possible to find durable income and an asset class that’s defendable in a world which has been turned upside down. What used to be something of a negative story for real estate – that it’s more illiquid than other assets classes – has now turned into something positive, comments Chris Brett, Head of EMEA Capital Markets at CBRE. “With real estate you have an asset that is not subject to price movements on a daily basis, locally, globally or wherever you want to be.”
Global investment volumes remain around 40 percent off the prior peak recorded in the middle of 2019, while transactions in the US – the largest market worldwide – have plummeted 50 percent, data from Real Capital Analytics shows. Australia has, somewhat surprisingly given the stringency of its lockdown policy, bucked the trend with transactions up over the last couple of years on the back of investments from European investors such as AXA, Allianz and APG.
The Germans were the leading European investors in the US in 2021, with a total of $2.2 billion in acquisitions, followed by the Swiss with $1.5 billion. Together they accounted for more than half of the US total of $6.2 billion. The French led the European investor league in Asia-Pacific with transactions totalling $2.2 billion. The Germans ranked second with $1.8 billion.
Now that travel restrictions are easing, Union Investment is also looking to continue to extend its global footprint, and in preparation last year merged its three international investment units – Americas, Asia-Pacific and Retail – into a new department called Investment Management Global, headed up by Henrike Waldburg. The company is renewing its focus on asset classes that have proved fairly resilient throughout the pandemic, such as US multifamily, light industrial and necessity-based retail. “The team was able to acquire assets in excess of $425 million in the US in 2021 in a few of these dynamic asset classes, further diversifying our existing robust portfolio,” Matthew Scholl, Executive Director and Head of Investment Management Americas at Union Investment, says.
The logistics sector has attracted the attention of the biggest investors globally. Everybody wants a piece of it.
Everybody wants a piece of logistics
While retail properties, in particular shopping malls, have been challenged by the pandemic, logistics real estate has experienced “unbelievable” growth in the past 18 months, CBRE’s Brett says. The sector will continue to thrive because it is the one everybody wants to get into. Land is scarce almost everywhere and demand from occupiers and developers is unprecedented. “The logistics sector has attracted the attention of the biggest investors globally. Everybody wants a piece of it.”
Amsterdam-based Bouwinvest Real Estate Investors identified logistics and residential – or “sheds and beds” – as resilient sectors before the pandemic and the two sectors now account for more than 50 percent of the company’s international portfolio. In the US, where multifamily has been an established institutional investment class for decades, Bouwinvest has teamed up with developer MacFarlane Partners to invest $750 million in residential high rises. Two investments have already been made via a partial equity interest in Level BK, a 40-storey rental apartment tower along Brooklyn’s Williamsburg waterfront in New York, and full ownership of the 24-storey Park Fifth high-rise rental apartment project in downtown Los Angeles. Asia-Pacific is also a target: Bouwinvest is developing private rental schemes in China and Japan together with US-based multifamily specialist Greystar.
Teaming up with local partners through joint ventures, or fund participations, is a common international strategy for big institutional investors like APG and AXA, as well as sovereign wealth funds including ADIA and GIC. Around 50 percent of deals by volume are done with a joint venture partner in Asia, and in North America the figure is around 40 percent, RCA data shows. Finding the right operational specialist will become a big theme in 2022, CBRE’s Chris Brett predicts. “Large sovereigns have more and more capital to deploy into real estate and they need to be with the right player.”
European investors discover the charms of other niches
Asian and US investors were predominantly the first movers into life science real estate, but European money is now flowing into the sector as well, Chris Brett says. “Demand from European investors for niche segments like life sciences and also data centres is huge. It was a massive topic in 2021 and it will only grow further in 2022. Both these asset classes offer durable income streams. As populations increase, the insatiable appetite for data will grow as well.”
AXA Real Estate is pioneering the move into life science properties in Europe with its acquisition of the Kadans Science Partner platform, which has become the cornerstone of a new €1.9 billion fund to invest in the sector. Bouwinvest meanwhile has made its debut in this niche via a $60 million participation in Blackstone’s recapitalisation of BioMed Realty, which owns life science facilities across the US.
“Life science is very much top of mind in the Covid-19 era and there’s a huge amount of interest in biomedical research facilities. We expect to focus more on this niche, which caters to all those parties dealing with innovative and creative developments such as Covid-19 vaccines and other medical treatments and cures that can really make a difference in our world. There’s a real need for this type of real estate, and we only see it growing,” explains Stephen Tross, CIO International Investments at Bouwinvest.
We were able to acquire assets in excess of $425 million in the US in 2021, further diversifying our portfolio.
Will offices remain a mainstay?
Union Investment is also exploring the life science and data centre sectors, but in the Americas it remains focused on the traditional mainstream asset classes of offices, multifamily, hospitality, urban/necessity-based retail and logistics. While offices have fallen out of favour since the pandemic, particularly in the US, RCA data shows it remains the preferred sector for most European buyers in the Americas and Asia-Pacific. The US is the main target, followed by Singapore and China, which explains why the impact of Covid-19 has been more significant on the North American office market. APAC investment is more diversified across sectors, which has helped to cushion the downturn.
Office investments have been placed under severe pressure by Covid-19. Working from home appears to be a strong market trend that is here to stay and the longer the pandemic goes on, the more uncertain the future of the office is. One thing that is clear, however, is that offices, alongside residential, have the biggest part to play in the transition to a carbon-neutral real estate industry, and therein lies an opportunity. All the big global real estate fund managers have appointed an ESG head in the past 18 months or so and the topic is foremost in the minds of many investors. Developers are, in response, increasingly adopting net zero-carbon ambitions.
Union Investment is dedicated to sourcing and acquiring opportunities with a strong focus on ESG, Henrike Waldburg says. “When assessing opportunities – regardless of asset class – the team uses local benchmarking tools to ensure that we have a comparable dataset for our assets around the world.”
Finding product remains a challenge, however. “There’s never enough product, that’s the reality. That’s what changes pricing and keeps the market moving… The world’s not going to stop just because of Covid,” CBRE’s Chris Brett concludes.
By Judi Seebus