Residential assets grab spotlight in private-equity real estate market: panel

Feb 17, 2022

INVESTOR interest is heating up in the private equity residential real estate markets, as these assets will likely remain a calculated hedge against inflation and pandemic-related volatility, several industry participants said at a panel discussion this week.

The burgeoning demand also comes as many institutional investors - the likes of pension funds, insurance firms and sovereign wealth funds - are still well below their target allocations in real estate and hauling in record amounts of dry powder.

They are thus expected to grow their allocations to real estate in 2022, panellists said at the Feb 16 hybrid event organised by Singapore-based private equity firm Q Investment Partners (QIP).

JLL head of capital markets research for Asia-Pacific, Regina Lim, estimated that institutional investors in the region will need to spend another one-third of what they have pumped into real estate to reach those targets, even though their investments in the last 12 months were not insubstantial.

In her view, the problem is not a lack of buyers but a scarcity of product. "Institutional investors are looking for quality assets in good locations, with a positive outlook for the demand-supply dynamic, and which fits their strategy." She went on to note the swell in core and core-plus capital looking for stable-income assets such as residential properties.

Over in Japan, Chedli Boujellabia, chief executive officer (CEO) of real estate investment management firm Alyssa Partners, has observed a surge in investor appetite for multi-family housing. Many investors have started injecting capital into the residential sector, "mainly because it delivers the stability that everyone's looking for, when other asset classes are struggling with a lack of liquidity, volatility or uncertainty", he said.

QIP co-founder and CEO, Peter Young, pointed out that the overall residential sector has stayed resilient despite the pandemic, with rising rents and capital values in the Asia-Pacific.

However, it is important for the sector to evolve alongside changes in the ways people work, live and play. Residential products ought to become "more tailored and curated", as people get "fussier" or more discerning, Young said. "The challenge will be for investors and developers to be more in sync with today's theme of living… We have to view what we're creating as not just a commodity but also people's homes, which they now value much more than they did 2 or 3 years ago," he added.

In a similar vein, Paddy Allen, head of operational capital markets at Colliers UK, has noticed more distinct verticals and designs emerging in the UK housing market in the last couple of years. Each vertical caters to a specific type of customer, unlike "the more vanilla buildings that try to do a bit of everything for everyone", he said.

For instance, within student accommodation, there are now discrete products at different price points, as well as graduate housing. The UK's more mainstream residential segment has also seen the advent of single-family housing in the past 2 years, Allen noted.

Meanwhile, Lim drew attention to what she reckons is a structural trend of more individuals in the Asia-Pacific renting their accommodation instead of buying.

The region's populations have long shown a strong preference for owning their residential properties, driven partly by policies that encourage homebuying. But gradually, some of these policies are changing and now aim to persuade individuals to rent, in response to factors such as declining housing affordability and growing pressure to allow young professionals to live closer to city centres.

Therefore, she foresees the supply of multi-family, rental and build-to-rent housing to increase, particularly in China, Australia and Japan. "Investors want a first-mover advantage in these sectors, which they see as very scalable and a great way of getting some yields," Lim said.

"We're in the middle of a structural change, and we'll see more product, more renters, and maybe more residential Reits (real estate investment trusts) in this region like we've seen in the US and Europe," she added.

And as inflation fears intensify around the world, PERE (private equity real estate) investors will need to be aware of increases in operational costs and development costs, Allen noted.

A potential bright spot for incumbents is that the higher costs could raise or at least sustain the barriers of entry into various real estate sectors. "Investors with the specific skills to manage and invest in certain sectors will be able to demonstrate that expertise to drive value, and it will probably deter some newer investors," Allen said.

Boujellabia echoed the sentiment. He highlighted that imported inflation in Japan has been concentrated in energy and construction materials. From a competition perspective, it can provide "a nice cushion for existing inventory", as anyone developing a new building will have to charge higher rents than at existing buildings nearby, due to the higher costs.

However, he flagged that at the same time, inflation could be a negative for any investor planning major capital expenditure or renovation works. It will also hurt when it comes to ongoing maintenance and energy bills, he said.