This article was first published by sister title PERE as part of its Global Investor 100 coverage

Although covid-19 has upended daily life around the world, including global capital markets, this disruption has had little impact on the trajectory of institutional investment in real estate.

Investors of all stripes remain keen to grow their property portfolios to compensate for diminished fixed income returns and capitalise on appreciation. In fact, both factors have been exacerbated by the crisis. Central banks have pledged to keep benchmark interest rates at record lows until economies stabilise, and the promise of pricing dislocation has opportunistic investors champing at the bit.

How each group is pursuing those goals depends somewhat on their size. Larger sovereign wealth funds and pensions have been able to form joint ventures with managers. Smaller allocators have been limited to public market acquisitions and commingled funds. Location plays a role too, with some groups unwilling to deploy to certain regions until more progress is shown on containing the virus.

Sticking with the familiar

Across the board though, investors have leaned heavily on existing relationships as travel restrictions have prevented them from meeting new managers and conducting proper due diligence. They are also drawn to more focused offerings from specialist managers rather than diversified, blind-pool vehicles.

“New funds will have the advantage of a vintage year which, compared to prior years, should see less aggressive underwriting,” Christoph Donner, chief executive of Allianz Real Estate of America, tells sister title PERE. “If you come in with new money in a down market that should have an uptick, it‘s clearly a big plus for investors. The more specialised funds are probably more favourably received than a commingled box of everything.”

The real estate arm of the German financial institution Allianz Real Estate holds the number two spot on PERE’s Global Investor 100 with $59.4 billion allocated to the asset class. Donner says his team has remained active through the pandemic as both a lender and equity investor. The focus has been on stable assets with secure, long-term cashflows, including industrial properties and multifamily, the two darlings of the covid-19 era. But it also remains active in office, which accounts for about half of its overall assets under management. Donner says the firm is willing to look past current uncertainty in the office market, so long as the properties have strong credit tenants.

Countries in Asia and Europe, where the virus has been better contained, have seen transaction volumes pick up in recent months, Donner says, which has led to price discovery. While the US remains attractive for Allianz, Donner says the patchwork of different responses to the virus has raised some questions about the market: “The US is a bit of a mixed bag right now, so we’ll have to see how quickly it can come back to the investment volumes that it’s used to.”

Dutch pension provider APG, the number three investor in the GI 100 ranking at $51.5 billion, has committed additional capital to funds, joint ventures and club deals it was a part of prior to covid-19, says Robert-Jan Foortse, APG’s head of European property investment.

During the past decade, APG has reduced its dependence on funds in favour of structures that put it in more direct alignment with its partners, Foortse says. During the global financial crisis, the group felt its commingled fund managers were being pulled in too many different directions by their various investors to act decisively. “We’ve moved toward more club deals and joint ventures, and what we’re noticing right now is that, even though it’s not a great time in real estate at the moment, for our partners, who are also typically long-term, like-minded investors like big sovereign wealth funds, it’s much easier to agree to a plan of action than a commingled fund,” he says.

APG has put a pause on new relationships in Europe and the US until travel restrictions ease. But it has begun exploring new Asia-Pacific ventures from its Hong Kong office. Globally, the group has focused on data centres, logistics and rental housing, Foortse says, adding that his team is also considering options in the hospitality sector, given the distress in that market. Geographically, the allocation strategy will remain roughly 40 percent Europe, 35 percent Americas and 25 percent Asia-Pacific.

Regional variations

Regionally, investors are taking different views on certain parts of the market. In Asia-Pacific, demand for office property actually increased after lockdowns kept workers confined to their homes, an investor survey by the brokerage CBRE found. Before the first shelter-in-place orders were issued in Wuhan, 37 percent of APAC investors listed office as their sector of choice; that jumped to 47 percent, making it the top property type by a wide margin. In a similar survey in the Americas, only 11 percent of investors preferred office assets, ranking them third behind industrial and multifamily.

US investors are bracing for declining office and retail valuations this year and next. A survey of managers, advisors and researchers conducted by the Pension Real Estate Association in August found that respondents expect appreciation returns of -15.4 percent and -6.8 percent for retail and office, respectively, through 2020, followed by -5.9 percent and -3.5 percent in 2021. With those two property types making up the bulk of many portfolios, total returns are expected to hit -2.7 percent this year and 2.5 percent next year before bouncing back to 7.3 percent in 2022.

While most real estate assets, both public and private, have seen values stagnate or decline this year, data centres have thrived. Given the increased need for computing power during shelter-in-place, these assets proved to be essential infrastructure. Subsequently, investors have gravitated toward this sector, particularly in the fast-growing and short-supplied Asia-Pacific region. The Abu Dhabi Investment Authority, for one, was an anchor investor in a $1.3 billion data centre fund launched by Gaw Capital. ADIA, the sovereign wealth fund, topped PERE’s Global Investor rankings yet again, this time at $62 billion.

In North America, public pensions are also expanding pre-existing partnerships. In early September, the Canada Pension Plan, number 11 on the GI 100 ranking with $33 billion committed to real estate, made a seed investment of ¥25 billion Japanese (€200 million) into GLP’s Japan Income Fund, an open-end vehicle targeting logistics assets. CPP has been a joint venture partner for the Singaporean industrial specialist since 2011.

The Teachers’ Retirement System of Texas, number 19 in the GI 100 with $22.2 billion in real estate, is attempting to emulate the success of Canada’s pensions by engaging in more direct deals. This year, TRS’s principal investments program surpassed 50 percent of its total real estate holdings. During its July board meeting, Eric Lang, senior managing director of the private markets program, says the pension’s exposure to rental housing and logistics has positioned it well for the current crisis.

“We have never been big retail investors [or] hotel investors,” Lang said during the meeting. “We aren’t changing our style any. We’re still going to go where we think the demand is, which is industrial as well as residential because people always need a place to live and, in this new environment, with more online shopping, industrial has been a winning sector. We are concerned with some of the sectors. But the portfolio is positioned well in this environment, and any new investment, we’re stressing them quite a bit.”

Appetite for niche

Prashant Tewari, a partner with Cleveland-based Townsend Group, an advisory firm and multi-manager, says the disruption in traditional staple property types has forced more of its clients to embrace niche property types that have been positively impacted by the pandemic. “Many of the large investors have stayed away from alternate sectors within real estate. But today, because retail is not a preferred asset class and so much uncertainty surrounds office, the two largest sectors on a relative basis, it’s important to consider opportunities within sectors like data centres, medical business offices, single-family rentals, etc,” he says.

Although opportunities have been fewer, smaller investors are also hungry for niche properties and specialised strategies. Makena Capital Management, a California-based firm that invests on behalf of endowments, foundations, family offices and sovereign wealth funds, is keen on data centres and niche housing types, such as affordable, senior, student and single-family rental, head of real estate Jonathan Van Gorp says. So far, most of the $20 billion allocator’s opportunities during the pandemic have been with listed REITs.

After the longest economic expansion in recorded history, Van Gorp says the firm’s top priority for new managers is a track record of identifying quality distressed assets and acquiring them.

“There are a significant number of firms that were formed over the last five to seven years against a very healthy macroeconomic backdrop,” he says. “We’ll be placing an increased emphasis on those with a significant track record prior to that and a demonstrated ability to execute in previous periods of distress.”

Nuances can be found in institutional approaches to private real estate amid the crisis. But common to most investors is a residual desire to increase their holdings in the asset class.