It was great to be at such a well-attended GRI Europe event in Paris this week, and a 25th anniversary celebration of the GRI Club no less. Lovely also for us to catch up with so many clients and other real estate investment contacts all in one spot.
Everyone was in high spirits and the mood was buoyant on the whole, though the view on investment prospects in the market in the near term was more circumspect. With transaction volumes still low and opportunities relatively scarce, the overwhelming message was of the need to ‘be smart’ in every aspect of investment strategy in order to find value.
As each discussion forum played out, and whilst opinions varied, what became clear was that the way we perceive and access investment in relevant and valuable space is changing as we pivot into the next cycle of the real estate market. Some of the key conference takeaways on those themes are set out in this post.
- Be smart on asset selection. Focusing on sectors with strong fundamentals for growth is critical. To that end, investors favour sectors which are driven by socio-demographic trends and, therefore, have capacity to expand materially. A number of people were favouring senior living, student housing, BTR/PRS and, to some extent, hospitality for these reasons.
Within such discussions, much was said about the importance of the underlying spaces themselves, as well as the experience for end-users. This emphasised that real estate is becoming more and more operational in nature, with a strong focus on service for customers rather than outdated concepts of the traditional tenancy relationship.
ESG was a very hot topic within the theme of operating assets. The general sentiment was that, whilst we have all learned from the need to focus on the well-being of end users of real assets – the ‘mindful experience’ so to speak – we have barely scratched the service of how we adapt buildings to tackle an ever-growing climate crisis. A number of offices, amongst other investments, are fast becoming obsolete and there is a need to reposition and recover them as assets of real value, but this will take a significant amount of time.
- Be smart on structuring. In a dislocated and somewhat stressed market, investors are becoming increasingly agile in investing across the capital stack.
Gap funding and other short-term liquidity solutions are becoming more attractive as a way to access new investments and new partnerships. The number of preferred equity deals, for example, has been growing in recent months.
- Be smart on partners. As investors look to diversify their investment strategies, the importance of finding the right operators to partner up with is key. The increasingly operational nature of real estate, the integration of new technologies and growing focus on ESG mean that institutional investors must be smart in managing assets with the right specialist expertise and experience.
Partnering with new operators can also open up more avenues to invest and grow volume, provided that JV terms provide for genuine alignment of interests. Lenders in this market are also particularly focused on the identity and skillset of operators within their underwriting and associated covenant protection.
The question for a lot of investors is not whether to partner up, but more what strategy to deploy in doing so, for example thinking about whether they deploy one pan-European partner or country-by-country. Capital partners are becoming increasingly diligent in their partner search and selection, and laser-focused on what their rights are in a divorce scenario.
No-one thinks we are through this turbulent turning of the investment cycle, but there are still deals to be done if you are thoughtful and creative. All the while, the power of human capital is not to be underestimated. Be smart. Easy…
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