Figures from June showed a substantial increase in investor appetite for value-add real estate strategies. Twice as many investors expressed a desire to gain exposure to that risk-return profile than to any other. This reversed the trend in May when more favoured core and core-plus strategies. In many of the developed markets, in particular the UK and the US, vaccination programmes and the prospect of restrictions easing appear to have changed institutional appetite for risk.
In prior months, we observed a bifurcation of approaches. Some investors viewed the market through a distressed lens and were attracted to capital structures or sectors that were clearly dislocated, such as parts of the hospitality industry. Others adopted a more cautious and conservative policy, focusing on resilience of income, sustainability of cashflow and underlying asset quality.
In June, more investors sought to deploy capital with a value-add mindset. They generally are focused on underwriting asset-level business plans, underpinned by growth. They are attracted to resilient sectors, such as industrial and residential, but where they can also take asset-level risks to improve the quantity, quality and duration of income.
It is not only the prospect of economies reopening, growth returning and the pandemic fading that is leading to investors favouring value-add over core and core-plus, but also the pricing of the core assets themselves. Core assets in sectors such as industrial and residential are as expensive, if not more so, than they were pre-covid-19. As a result, those investors that prefer to invest in the more resilient sectors seem prepared to take on more asset-level risk to achieve their target returns.
Distressed hospitality continues
Despite the prospect of restrictions easing, in the past few months it has become clear that the traditional summer vacation season is likely to be disrupted for a second successive year.
Certain hospitality assets that managed to weather the impact of the various lockdowns last summer may not have strong enough cashflows, reserves or balance sheets to survive another poor trading season.
As a result, investors are once again searching for distressed hospitality assets. and that is coming through in our sentiment numbers.