This article was originally published in January 2021.

Traditionally, real estate was often viewed as little more than a downside hedge for a diversified portfolio. This reflects its low correlation with equities and bonds and its perceived inflation-linked income profile. It was frequently viewed as a relatively stable, reliable but unexciting investment option.  

While this perspective has been outdated for some time, rapid evolution in the sector over the last decade has rendered it obsolete. Real estate today is a truly global institutional market with much improved transparency and offering a holistic set of products to suit every investor’s risk/return appetite. Options range from low-risk, lower-return core investments through core-plus, value-add to opportunistic at the top of the risk spectrum.

Real estate investments are more liquid than ever before, with active cross-border capital flows supporting a deep and sophisticated market. Rather than just being an add-on for multi-asset portfolios, it offers attractive opportunities and risk diversification in its own right.

Several characteristics make this possible: the unique attributes of every single asset; changing occupational preferences; the integration of technology; and a shift from real estate as a static investment class towards an operational model focused on delivering a full service to the occupier.

Every asset is unique

First, every single building is unique. No two buildings are identical in terms of structure, specification, occupancy profile, utilisation, macro and micro location, adjoining land uses or demographics. This heterogeneity offers investors access to a near limitless range of assets at varied risk profiles. Specific asset risk can be spread across multiple asset types and geographies within diversified portfolios. A diversified approach balancing cyclical and counter-cyclical sectors, income growth and capital appreciation strategies can deliver reliable income returns through market cycles with the potential for outperformance.

Changing occupational demand creates opportunity

Secondly, changing occupational preferences have led to a much more dynamic leasing market in which everything is to play for. With the right strategy it is possible to actively acquire or create stock that can make new markets, attract new occupiers and generate new income streams. Informed investors can actively protect, create and grow income regardless of wider economic conditions in a manner rarely available to investors in bonds or equities.  Landlord relationships and asset management have a significant influence on occupier attraction, retention and chargeable rents and like every property, every occupier is unique. Real estate also offers direct exposure to mega-trends such as demographic shifts, changing consumer preferences and technological evolution. Importantly, it offers the opportunity for investors to directly implement real world outcomes. This is a critical factor in the context of the increasing need to invest responsibly, achieve ESG objectives and mitigate the worst impacts of climate change.

Technology is improving the sector

Thirdly, technology is increasingly being integrated into real estate in a way that is shaking up the traditional model. It brings a new level of visibility to the sector, allowing unparalleled granularity of analysis to maximise asset efficiencies and rentalise space. It will offer new revenue generation opportunities and even more ways for investors to differentiate their assets from their competitors’. It also offers avenues to spread capital by funding new proptech concepts which, if successful, can be spun off as separate ventures independent of physical real estate. The sector is on the cusp of a technological revolution that will bring even greater empowerment, further sophistication, and unparalleled opportunities for entrepreneurial investors to capture outperformance.

Operational real estate brings new income prospects

Finally, real estate is shifting from a static investment model towards an operational model. Performance is no longer about buying and holding an asset and collecting rent for 20 years. It is no longer that dull or indeed that easy! To protect, create and grow income today, investors must actively manage their assets, partner with their occupiers and view them as customers rather than commodities. Real estate is now a service to occupiers who, through advances in technology, have more choice than ever about where and what types of property they lease. While this may mean shorter leases, which could be perceived as riskier, it increases the returns available for investors who can deliver unique product that is well aligned to occupier demand and accompanied by a high level of customer service.

These four characteristics make the proposition of real estate investing more compelling than ever. This explains rising capital allocations to the sector, growing portfolio weightings and sustained investor interest in it. The sector has come of age.