Additional considerations for core investors
For investors in core real estate, looking beyond traditional sectors for opportunity is one of several important factors to consider in 2023, in conjunction with geographical diversification, ESG, fund size and tax implications. Geographical diversification has the potential to provide essential benefits given the differences in individual countries, and it should be achieved by pursuing an exposure in line with the size of each market as this helps manage liquidity issues. From a geographical perspective, it’s also important to understand how individual regions have been impacted by and are responding to critical challenges such as the heightened geopolitical tension between the NATO alliance and Russia, or the rising impact of extreme weather events. Since buildings are a major contributor to climate change, ESG policies and initiatives, including the implementation of carbon neutrality proposals, will remain a top priority for occupiers, landlords and investors. In real estate investing, ESG considerations can help to improve investment outcomes by aligning stakeholder interests, facilitating operational excellence, and reducing overall risk.
Actual fund size plays a critical role as well: very large funds may be unable to obtain the right exposure to the new industries benefiting from structural changes, a necessary requisite to perform well through the different phases of the economic cycles. Traditional sectors inheritance can be limiting large funds, with potential drag on returns. On the other side, smaller funds are agile enough to pursue alternative strategies, by gaining exposure to those sectors better positioned to benefit from the upcoming demographic and technological changes, including data centres, healthcare and student housing.
Tax considerations, within both countries and sectors, are another factor for investors to keep front-of-mind as policies evolve. The complexities of real estate tax policy can be challenging to comprehend, and as governments seek new areas for revenue generation, we anticipate the tax landscape will continue to evolve within individual countries but also for the EU as a whole.
In conclusion, several factors impact core investing, from non-traditional sectors’ exposure, to geographical diversification, ESG, size and tax considerations. All these elements are not immutable, but rather evolve in line with the economic cycle. We believe that partnering with a fund manager who shares the right strategic framework and is nimble enough to implement it in sync with the macro environment can add great value to institutional investors.