AIFs gaining in popularity as investors seek ‘to exploit specific opportunities’

A desire ‘to exploit specific opportunities’ in real estate has become the main driver for investing in real estate special AIFs, according to Lagrange’s sixth Fund Monitor 1H/2023 conducted with INVESTMENTexpo.

Almost 40% of respondents cited that as their main goal, with an additional 33% citing diversification. Inflation hedging is quoted by 20% of the respondents as their main motive. However, German institutional investors are now planning to expand their real estate portfolio shares at a slower pace than was assumed in late-2022. Acquiring shares in real estate special AIFs on the secondary market is becoming a more viable alternative to direct investments in these institutional funds, according to the survey.

‘On the whole, institutional investors principally take a bright view of institutional real estate funds, although a closer look at the preferred asset classes and target markets reveals growing differentiation,’ said Dr. Sven Helmer, managing director of Lagrange. ‘Traditional asset classes have been less in demand than they used to be, whereas some of the former niche segments, such as light industrial or real estate with public tenants and alternative use potential, seem to have become more and more attractive lately. While inflation definitely drives higher real estate allocations, interest rate changes have clearly less influence on the allocation. Moreover, buying or selling fund shares on the secondary market is increasingly becoming an alternative to the primary market.’ The polled institutional investors largely constitute insurance companies, banks, pension funds and pensions schemes.

Predictably, risk tolerance remains low, with core-plus and core investments accounting for 44% of investment, down just 1% on the second half of last year. Core investments came in second with 33%, down from 35%. Combined, these asset classes accounted for more than 75%, compared to value-add with 19% and opportunistic assets with just 5%.

Is food retail losing its lustre?

Residential and offices are the preferred asset classes, albeit less in demand than in late-2022 and there is waning interest in food retail and logistics, according to the survey. Interest in retail with a food share of 70% or more, which used to be very much sought after, has declined markedly to just 8% of the named preferences (2H 2022: 15%). While all four of the traditional asset classes suffered either a modest or noticeable slump in investor interest, two asset classes that used to be considered niches have become more mainstream, including light industrial, with 10% (2H 2022: 8%), just behind logistics. The other represents assets with public-sector tenants, including municipal administrative buildings with alternative use potential (8%) and health care/senior living (7%), which are also generating significantly more interest than before.

Germany retained its lead position after being named by 17% of respondents, although the ranking of foreign markets was reshuffled. The US is the leading foreign market, with 13%, trailed by Canada and Austria, which hit a new high of 12%. The Benelux region took just 9% of the vote, with the UK accounting for a paltry 3%.

The biggest challenge that respondents face when investing in real estate special AIFs are high property prices and low cap rates, which were named by 37% (2H 2022: 13%). The second biggest challenge at the moment, according to 27% of respondents, is financing real estate investments (2H 2022: 20%). This contrasts with the risk of falling prices and rents, which presents a challenge for 17% of respondents (2H 2022: 40%) and was level with the challenge of a lack of suitable properties (2H 2022: 27%).

Interest rate hikes not affecting majority of allocations

When asked about their inclination to buy shares in real estate special AIFs on the secondary market, respondents returned an average score of 6.51 points. Here, a score of 1 would indicate a complete lack of interest, whereas a score of 11 would signal a very keen interest. With a score of 6.44 points, respondents were more interested than ever before in the option to sell shares on the secondary market (2H 2022: 6.13 points). At the same time, the gap between the number of those interested in buying and those wishing to sell has visibly narrowed.

As far as allocation adjustments due to inflation go, there was virtually no difference between the short and medium-term outlook. In either case, roughly two out of five respondents would not rule out an increase in their real estate special AIF allocations, whereas three out of five are not planning any changes. Due to the interest rate development, about 20% of respondents intend to reduce their real estate special AIF allocation both in the short and medium term, whereas, interestingly, interest rate hikes will not influence the allocations of the other 80% of investors.