Founder and Managing Partner of Club Estate a leading real estate investment boutique for family offices and institutional clients.
The real estate industry is transforming at an unprecedented speed, with the Covid-19 crisis acting as an additional catalyst for change. Technological developments in proptech, the impact of ESG criteria and the changes in the way people live, work and shop are having a profound impact on all aspects of the real estate value chain, including how family offices and institutional investors allocate their capital. What are the emerging investment trends in real estate investing? How can professional investors take advantage of market opportunities and manage their real estate exposure in the current fast-changing environment?
A recent report on the investment sentiment of 150 institutional investors in Europe shows a decreased appetite for risk and a greater focus on climate-friendly investments and core properties. According to the study, logistics and health care are the most in-demand asset classes. My own experience with family offices is that they are currently active in market screening for distressed real estate opportunities and are willing to take advantage of the current environment.
A study by Knight Frank outlines three key investment trends of family offices. Firstly, family offices are hiring professional real estate specialists and compete directly with institutional investors on transactions. Secondly, there is a rise in alternative real estate asset investments like student housing, health care facilities and data centers. Thirdly, there is a rise in deal-by-deal co-investment solutions and club deals to share exposure on certain larger assets.
These trends mark a shift from blind pool investments toward a more targeted direct real estate allocation. Blind pool fund investments have for decades been the investment method of choice used by professional investors to allocate capital. They offer a high degree of diversification, a standardized setup and a one-stop solution for the investors. However, due to constraints like their rigid investment guidelines, commitment-based approach and higher cost structure, the alternative direct deal-by-deal investment strategy has become a preferred investment method for some professional real estate investors. Co-investment solutions – joint ventures, club deals and sidecar investments – have become a key offering in the industry. According to PERE, the top 20 managers raised more than US$29 billion in funds for sidecar investments. Over the last six years, an average of roughly US$36 billion exchanged hands in partial-ownership real estate transactions per annum, representing between 6.3% and 9.5% of the private real estate transaction market.
My own company recently reported that based on industry studies as well as market signals, the demand for co-investment solutions is likely to remain high. Unlike blind pool investments, deal-by-deal co-investments offer the investor a higher degree of transparency and control. Co-investment solutions, therefore, represent a powerful tool for family offices and institutional investors to adapt to challenging investment environments, such as the one we are currently facing. Key advantages are the flexibility to react to a changing investment landscape and focus on investments in real estate growth areas. More importantly, capital can be instantly deployed in a targeted manner. Investment fee levels for co-investment structures are often lower compared to blind pool funds, resulting in higher investor returns. However, it’s important to keep in mind that real estate co-investment solutions are most feasible for professional investors who are willing to accept the higher complexity of these investments. The transactions usually are time-sensitive and require a certain speed of execution. The nature of these investments come with certain regulatory and compliance hurdles to overcome.
Leading co-investment platforms offer services and access to vetted co-investment opportunities with best-in-class managers, and investors are able to opt-in on a deal-by-deal basis. By investing alongside best-in-class local managers who participate in each transaction and have skin in the game, interests are aligned. This alignment and the transparent, direct exchange of information between investors and the local investment manager are key to unlocking the full potential of each investment. Depending on the ownership levels, control rights can be negotiated on a case-by-case basis.
In the context of their existing real estate allocation and liquidity needs, professional investors are able to create customized exposure to fast-growing real estate segments. What I emphasize to investors is how a systematic selection process at both the manager and deal level is key. A thorough selection process helps ensure partners are trustworthy and best-in-class when it comes to their respective expertise – and their knowledge of region, sector and style. The track record of completed deals, senior management team, as well as incentive or governance structures should all be thoroughly assessed.
In a fast-changing investment environment, real estate co-investment solutions offer a targeted investment approach with a focus on high growth segments in the market. They give investors the possibility to participate in attractive opportunities on a deal-by-deal basis, making them one alternative to blind pool fund investments. While there are important considerations to weigh, investors can use real estate co-investments as a tool to navigate through the ever-changing real estate investment landscape and potentially generate attractive risk-adjusted returns.