The appetite for real estate investment remains strong. Several significant trends contribute to investment priorities and strategies for, amongst others, private equity firms.
Interest in real estate and real estate investment is strong. In a market partially defined by COVID-19, vast caches of dry powder, developing technologies and changed investment priorities are among trends that define investors’ preferences.
BDO’s real estate and private equity teams are in close, daily contact with industry experts, companies, and investors. That contact, and our vast network of locally embedded experts spread throughout more than 160 countries, help inform our view on what is happening in real estate.
Here, we present five of the trends that BDO’s teams see as playing central roles for real estate investment in a post-COVID world.
1: High Investor Interest
As we head into the post-COVID ‘new normal,’ real estate is one of the premier targets for many investors across private wealth, institutional investors, private equity and more. One of the sector’s strong draws is its hard asset nature. Many investors are actively looking to add hard assets to their portfolios during uncertain times.
The sector’s attractiveness is boosted by the different investment options available that complement more traditional investment vehicles. REITs and crowdfunding platforms add capital to what are already unprecedented stores of dry powder. Simultaneously, low interest rate environments across many countries and regions support asset values and fuels demand.
Prime assets, especially in preferred segments such as multi family, industrial real estate, logistics and data centres, will see a lot of competition. This fact is augmented by a slower supply of new buildings in some markets due to COVID-19’s impact on construction.
Interest in the real estate market is somewhat tempered by uncertainty surrounding mitigation measures and the delayed fallout of tax and insolvency deferrals.
A great deal of capital may be awaiting deployment or see slower deployment as investors look to mitigate some of the uncertainties they face.
2: Navigating Increased Uncertainty
Private equity (PE) firms and Real Estate Private Equity (REFE) funds are well-positioned to invest in real estate assets. Their strategy of acquiring and developing properties and then selling them to realize a return fits particularly well with the situation in 2021 and post-COVID-19, where many real estate assets need repurposing and redevelopment.
Identifying the optimal targets will rely on fully understanding the core business aspects of investment targets. This process has become extra challenging as COVID-19 has led to changes and increased economic and market uncertainties.
One thing is clear: more granular, data-driven investment analysis is needed to create the best foundation for deals during uncertain times. Access to marketplace insights and informed guidance is vital.
COVID-19’s effects vary heavily across countries and regions, making insights into local market dynamics increasingly important.
Areas such as recalculations of future rental cash flows and updated tenant risk profiles also top the to-do list of both construction companies and investors. Across all areas, the situation is further complicated by the lack of comparable historical data.
Investors will look to deploy a range of risk mitigation strategies as part of deals, as well as in their investment portfolios. One preferred tactic seems to be changes to portfolio composition and growth in alternative investments.
3: Flexible and Alternative Spaces See Growth
COVID-19 has not meant a farewell to the office. In most industries, the future of work looks likely to involve a combination of in-office and work from home (WFH). However, the office layout will likely change as the need for office stations for all employees recedes and the need for meeting and collaboration spaces increases. Simultaneously, the changes to work styles will likely necessitate increased coordination on a day-to-day basis of where and when a given employee or group of employees are working.
Means of repurposing existing office space and updating building layouts are among the needs of many real estate companies and a focus point for investors.
One of the big uncertainties in a post-COVID world when considering real estate investment is the risk of asset obsolescence. In other words, will changed real estate needs lead to certain assets losing most or all their value if they continue as ‘normal?’
One investment strategy for the coming years is an evolution of the fix and flip approach into a ‘flex and flip’ model. Here investors back redevelopment of building mass to increase occupancy rates and revenue before potentially selling the properties on for profit. This strategy will likely be particularly active in relation to developing adaptive reuse of unwanted retail, hotel, and office spaces.
The focus on flexibility will be even stronger for new constructions. In response to uncertainty, making sure that you have the inbuilt ability to change a space and adapt its use is often more straightforward with something that has not been built yet than something that is already there.
4: Sustainability and ESG
ESG and sustainability are increasingly contributing to the overall attractiveness and earning potential for existing real estate and buildings in the blueprints stage.
Across real state, sustainability, ESG and responsible investing are transitioning from additional, complementary strategies to a fully integrated part of traditional investment management.
Energy efficiency, construction carbon emissions, and climate adaption are increasingly valued by investors and tenants alike. The pandemic has furthered this impetus and making retail and office assets more sustainable when they are constructed or repurposed can be a way to create market traction during uncertain times.
Furthermore, the shift towards net-zero is also contributing to the attractiveness of buildings. Simultaneously, they increase their earning potential by being as self-sufficient as possible, for example generating their power or processing their wastewater.
Such areas are seeing a lot of rapid technological development, which is likely to accelerate further in the coming years.
5: Technology Will Keep Growing
Apart from real estate developments and hard assets, investor interest is rising in relation to technology used in construction, real estate, property management, and building interactions.
In a post-COVID world, buildings equipped with touchless technology and intelligent air quality monitoring stand to fetch a premium from both investors and tenants. Big data analytics is disrupting the way buildings are monitored and maintained, not to mention how they are constructed. New systems are streamlining and simplifying building processes for on-site construction – for example, quality documentation and reporting.
The above are just a few examples of how new technology is spreading throughout the real estate industry. For investors, keeping track of the new possibilities created by technology and which companies are making the best use of them will be a factor in evaluating what investment targets to pursue.