Real Estate Offers Opportunities for Private Market Investors in 2021

Mercer says investors should increase their risk appetite and consider allocating to real estate this year.

Despite a challenging 2020 for real estate assets due to the COVID-19 pandemic, private markets investors should consider allocating the asset class to their portfolios in 2021, according to research from consulting firm Mercer.

The research was part of a broader report from Mercer that focuses on what the year has in store for alternatives, as well as issues investors might want to closely monitor in order to optimize their portfolios.

“In 2021, investors should consider stretching their risk appetites and consider their allocation to real estate,” Raelan Lambert, global head of alternatives at Mercer, said in a statement. “Although the pandemic will continue to challenge the property market, 2021 is likely to be an opportune time for entering the asset class with a medium- to longer-term investment horizon.”

She added that investors should initially prioritize allocations to the largest, most-liquid markets, where price discovery is furthest along.

Mercer said real estate can provide “an attractive proposition throughout the market cycle,” adding that larger institutions have become more sophisticated in building up their real estate allocations over the past couple of decades, increasingly moving beyond their domestic markets and varying their allocations among risk styles.

According to the firm’s research, although real estate is currently the largest private market asset class for institutional investors, allocations are still growing and the value of the real estate market is estimated at about $8.7 trillion. A large portion of this is held by publicly listed real estate companies, with the privately traded share accounting for approximately half of the overall market cap, Mercer said. It also said investors seeking income-producing core and core-plus strategies often hold private real estate in open-ended, evergreen vehicles, while investors pursuing capital growth generation tend to prefer closed-end/finite-life funds.

Mercer also said the outlook for the real estate market varies based on geography.

“We see an abundance of attractive investing opportunities opening up in the North American real estate market,” according to the report. “We see particularly robust opportunities in life sciences, affordable housing, and logistics, as demand is so far sheltered from general economic conditions.”

Mercer said it also likes those same sectors in Canada, particularly in the greater Toronto market. It added that the sectors of life sciences and lab space will provide an “interesting opportunity” for both resilience and growth.

In Europe, Mercer said UK long-lease funds, which tend to have assets with long-term lease contracts to high-grade tenants, have maintained positive returns and it expects that to continue to grow. The report also said Germany is showing relative economic strength and strong investor demand.

“Across Europe and across risk styles, we continue to see growth potential in operationally intensive niche sectors as these come to maturity,” said the report.

And in the Asia-Pacific region, Mercer said there is strong demand from both domestic and offshore investors in Australia seeking its relative safe-haven status and positive long-term growth. It also said that throughout the region, the quick adoption of e-commerce during the pandemic prompted a spike in demand for data center and logistics space, which it views as an attractive investment as well.

“Valuations are slow to respond in this part of the world,” said the report, “but once the recovery sets in we are particularly interested in opportunities in China and Japan, where supply/demand dynamics remain favorable.”

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