As traditional approaches to investment in property change, there has been a growing need to clarify and re-define allocations into certain property classes.
Each investor arrives at property from a different perspective, but a common theme is the need to break-down and segment the ‘other’ section, which takes up about 25% within the overall property allocation. Much of investment in a property portfolio is still predominantly in commercial real estate; yet, although that part of the market is expanding, it is student housing and healthcare, leisure, storage, which are being invested and put into this ‘other’ category.
Of this 25% there is a growing interest amongst investors in the Private Rental Sector (PRS), as they look to new-build for their long-term strategy.
One key aspect of this long-term thinking, which asset managers and consultants are increasingly having to research and develop in their firms, is the increased importance of Environmental Social & Governance (ESG) principles which make up the portfolio. The jury is still out as to whether ESG is outperforming traditional factor investing, but the point (for a significant proportion at least) is moot. For investors, the ESG element leads to a bedrock of security that will undoubtedly strengthen the investment in the long term – regardless of the actual financial return.
Returning to the above point about defining certain property allocations, an exciting idea that consultants are keen to discuss (along with ESG principles) is that of the ‘future city’ – a forward-thinking vision that considers mega-cities to be evolving in their function and flexibility within a globalised economy, for which property needs to be equally as flexible in accommodating different uses; where space within property is not segmented into retail, or residential, or commercial, but able to facilitate all at any given time – think of the idea of the ‘home/office’, but reverse it to ‘the office-home (with some retail property nearby)’; then incorporate your ESG investment principles with your property allocation, as a means of building future property for a future global city, and you begin to see this idea in its broad terms.
Despite such an integrated vision for sustainable globalisation, the property market has stagnated between the Brexit vote and now, with corrections expected on the horizon (‘when?’ is the million-dollar question). Some pension funds have begun to sell their entire property portfolio, with the belief that value simply will not increase much further before the inevitable downturn. Yet the options available for investors – whether they want high/mid/low risk, or blended risk in their property portfolio – is so broad and attractive that to expect a ‘Br-Exodus’ of property investment to Europe is unrealistic.
The only issue is the uncertainty that is around currently, which has put much of the short-term/opportunistic market on pause. How long it will take for the markets to really move (one way or the other) is anyone’s guess. In the meantime, while this uncertainty continues, building a long-term vision for property which encompasses a wholistic view of society (in both a global and its local contexts) will benefit investors as they communicate to their members their own vision of a secure, profitable, and beneficial future for various property in Europe.
Post by Ben McNamara - Clear Path Analysis.