There are green shoots in the real estate market as signs institutional investors are increasingly returning to the asset class.
The real estate market is attracting a wider pool of investors and institutional investors are at the forefront of this.
According to the 2022 Institutional Real Estate Allocations Monitor, allocations increased from 8.9% to 11.1% since 2013. An improvement in the quality of underlying real estate assets has helped stimulate this demand.
Real estate is heavily reliant on the lending market, and much has been done in the post Global Financial Crisis years to improve this environment. This has led to a lack of speculative supply, with poor quality projects finding it harder to find funding, and the value of other assets improving as a result.
A changing investor base
Attitudes among institutional investors have also changed, according to Invesco Real Estate's European Investment Strategist Mike Bessell who says there is a greater understanding of real estate among investors now.
"The willingness of institutional investors to invest in these assets has been a real change," explains Bessell. "This is one of the things that has driven [real estate] from being a smaller alternative sector to now featuring around 10% of institutional allocations in a typical portfolio."
In a sense, there are two real estate markets – the occupational market and the capital market. The former is the income stream generated by the occupation of these assets, and the latter is how these income streams are priced relative to other investments.
"We've seen those income streams relatively unaffected but the way they're priced by capital markets has changed," adds Bessell. "That's the yield change that we've seen. We're making sure we understand the relative winners from that in terms of those income streams, which in turn should then be better priced by the capital markets."
New tools for the trade
Technological innovations have unlocked new analytical capabilities for the asset class. It is now possible to access a wealth of new data about these properties, and process this in a fraction of the time it would have traditionally taken.
This is progress given how real estate has lagged other asset classes in terms of digital accessibility, Bessell explains: "Fifteen years ago, real estate data was just a series of rents and yields. While I can find an obscure company, look at its historic financials and trade it, I cannot do the same for an individual building.
"Two buildings, sitting side-by-side and looking identical, will have completely different rent, risk and yield profiles as well as different valuations. The availability of the kind of data that we need to do the analytics on micro-locations has just taken off."
Better quality data, and the increased ability to share and use this, are two trends driving the use of tech in real estate investment. The former includes the use of micro-locations data which can arm investors with greater insights.
To read the full Spotlight in association with Invesco, click here.
