UK is top European investment destination for non-listed property funds

After six years in the wilderness, the UK has regained its position as Europe’s preferred investment destination for non-listed real estate funds. According to the 2024 Investment Intentions Survey – published today by ANREV, INREV and PREA – the UK was the top investment destination, with a net positive score of 84%, up from 50% in 2023. It is followed by Germany and France in second and third place, with 81% and 65%, respectively. Substantial markdowns and opportunities for further discounts in the UK are likely to be driving this shift, the report says. After five consecutive quarters of negative capital growth, the UK All Property pricing correction since the end of Q2 2022 stands at -22.77% , in comparison to just -13.49% for Germany, and -14.19% for France. Shift to higher-risk strategies The pursuit of opportunities in the UK seems to be part of a wider shift in favour of higher risk strategies – a sudden reversal of the shift towards core strategies reported last year. In fact, more than three quarters (78%) of investors looking to deploy capital in Europe in 2024 are seeking higher-risk strategies, with the majority (55%) preferring value added strategies. In contrast, only 21% of investors chose core as a preferred strategy – this being the lowest share recorded since 2008. INREV says this echoes the search for value added strategies in the aftermath of the global financial crisis of 2008, where higher-risk strategies yielded substantial returns. “While the underlying causes of the current downturn are entirely different, early equity-rich movers may be identifying investment opportunities, anticipating a window to tap into a higher return potential,” INREV says. However, despite showing increasing preference towards non-core strategies – rising from 43% in 2023 to 64% this year – European investors remain the most risk-averse. The report also highlights the continued slowdown in appetite for real estate. Investors adjust allocation As market uncertainty continues, the gap between average current allocations and target allocations across Europe, Asia Pacific and North America, has decreased for the third year running. On a weighted AUM basis, the current average allocation to real estate globally is 10.6%, just slightly above the average target allocation of 10.4%. The slight overallocation is largely due to European investors who have an average allocation of 10.5%, which is 67 basis points (bps) above the average target. European investors are the most bearish on expected allocations, with a substantial 43% expecting a decrease in allocations and only 16% expecting an increase. Investors from Asia Pacific are the most bullish with diverse cross-regional investment plans – 41% of Asia Pacific investors expect allocations to increase, while 0% expect a decrease. Rise of residential The residential sector took the top spot as Europe’s preferred sector for the first time in the history of the survey, rising from 65% in 2023, to 90% in 2024. This was closely followed by industrial/logistics, which rose from 46% in 2023, to 87% in 2024. The results also reveal a substantial increase in investor preference towards student accommodation and healthcare in Europe, rising from 15% to 45%, and 19% to 35% respectively between 2023 and 2024. Despite a relatively small market size, student accommodation and healthcare are closing the gap with the office sector, which fell into third place with 52%, down from 69% in 2023. Interest in retail plummeted to just 16% compared to 31% in 2023, leaving this sector as Europe’s least favoured in 2024. Debt appeal Real estate debt maintained its position as the preferred access route into European real estate for the third consecutive year, with an 81% net increase. The higher degree of capital protection relative to real estate equity and limited availability of debt from traditional lenders serve as major pull factors. Only two other access routes into European real estate are expected to see a net increase in allocations over the next two years: joint ventures and club deals with a 47% net increase position; and separate accounts with a net positive position of 11%. The report says this highlights a desire to maintain greater control over investments, gain access to specialism and share the risk. Net-zero delay Across all three regions, the two most important factors affecting 2024 investment decisions were interest rates and inflation. In Europe and North America, the third most common response was the denominator effect, indicating that real estate capital deployment over the next year may depend on what happens across more volatile equity and fixed income markets. Investors from all three regions reported a stronger focus on diversity, equity, and inclusion (DEI) programmes in 2024. At 73%, DEI saw a significant jump in importance for European investors, up from 57% in 2023. More than half (59%) of investors globally have set a net-zero target, but almost 60% of these have identified a time horizon of post-2040 – a decade on from what many initially expected to be a goal of 2030. The report says this is likely to be the result of current market conditions and the costs associated with meeting net-zero targets. Times of uncertainty INREV director of research and market information Iryna Pylypchuk said: “The 2024 Investment Intentions Survey has highlighted the difficulties investors are facing as they look for returns in a higher-interest, and high-uncertainty market environment. “However, it is at times of uncertainty that first mover advantage is rewarded, giving room to be optimistic for cash-rich investors. “Despite many uncertainties prompting investors to adjust their allocations to real estate globally, as portfolios churn and investments mature, 85% of investors globally are expecting to deploy capital into real estate this year. “We are entering a window of potential mispricing and repositioning opportunities, be it through a bottom-up asset selection, by exploring market bifurcation or through private equity play as cash deprived players struggle to service their debt.” To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews Image © Shutterstock