Recent research from INREV, the European association for investors in non-listed real estate vehicles, explores the risk characteristics of the evolving operational real estate investment sectors in Europe and points to an anticipated rise in interest from investors and managers.
The research paper entitled ‘Operational Real Estate – Real Asset or Real Economy?’ identifies an emerging shift in thinking within the real estate industry. This is being driven largely by two megatrends: the change in investment approach from providing space as a product to embracing space as a service; and the long-term structural trends, stemming from accelerating economic and social megatrends. It highlights the growing need for investors and fund managers to find ways to unlock value from their assets and minimise risks in the face of shortening lease lengths and reducing business lifecycles observed in the traditional sectors. These factors point toward increasing attractiveness for investment in operational real estate.
According to INREV’s Investment Intentions Survey (2020), capital allocations to stand-alone operational real estate sectors in Europe currently stand at 11.8%. Given the strength of underlying demand drivers and increasing investor requirements, operational real estate’s share of the investment universe is expected to increase over the next decade.
The research highlights the implications for the investment approach in terms of objectives, structure, and resource requirements. It identifies the opportunities, risks and practicalities associated with an investment in the various models of operational real estate.
The findings reveal that investing in operational real estate has implications for required expertise, knowledge and the overall scale of the resource. They identify that the cost and range of this resource requirement vary significantly from segment to segment and intensify with the rate of participation in the operational business across the investment structures. The research also underlines the benefits of operational real estate investment, especially in terms of a large dispersion of risk/return opportunities and as a potential portfolio diversifier.
Iryna Pylypchuk, INREV’s Director of Research and Market Information, said: ‘This research maps out a clear direction of travel for the future of non-listed real estate: a shift in investment mindset from space delivered as a product to embracing space as a service. What is fascinating is the sheer diversity of potential investment options and risk mitigation structures available to investors and managers. For investors with the ‘real estate as a service’ mindset, it is also a choice to move up the value chain and partake in developing segments of the new economy.’