Opportunities and risks of consolidation
The real estate investment market is at the start of a consolidation phase – but investors can take advantage of the trend.
The past decade has seen great changes in the real estate investment market. This sector was once rather compartmentalised, with a primarily regional focus and few global players. Today it’s increasingly being dominated by providers who’ve become broader-based and are still expanding. In addition to the international investment firms, niche specialists are picking up an ever-larger market share.
Consolidation in the middle
Many of the medium-sized investment firms are either growing into international players or becoming niche providers and product specialists. “In the medium range, we’re probably still at the beginning of a consolidation process,” says Anne Kavanagh, CIO of PATRIZIA Immobilien AG. “The maturing process of a sector always goes hand in hand with consolidation, and that’s what we’re seeing now in real estate,” she adds.
The consolidation trend can be attributed in part to economic conditions: There’s a sharply rising demand for real estate in cities and growth regions caused by a steady inflow of investors attracted by the low interest-rate environment.
The consolidation trend is reinforced by cost and technology risks, as well as regulatory pressures on investment firms in the form of numerous compliance requirements: for example, involving information security and data privacy. Another important factor is digitalisation, with innovation drivers like big data, blockchain, the Internet of Things, and smart buildings. But big investment companies as a whole can benefit from economies of scale here, and so can overcome the challenges more easily than smaller competitors.
Investment managers with international experience are in demand
Consolidation is being driven in no small part by the behaviour of investors, who are demanding more from their investment managers and expect more international expertise. But because they tend to want to work with fewer managers than before, they prefer those who can offer relevant experience and expertise across boundaries and sectors. Investors also tend to rely on investment managers who to some extent have “grown up” alongside them, and who have shown that they can successfully manage expanding investment volumes. Investors expect a broad range of services as well, along with options for diversification and investment in all sectors, markets, styles of investment, and risk classes, from Core to Value Added to Opportunistic.
Today, the biggest challenge for managers is probably to identify and select attractive products, due to a general shortage of assets caused by the massive influx of investors. Anticipating future capital flows has also become more difficult, given the current low-interest environment and political uncertainty in some quarters (think Brexit). And all this is occurring in an environment where developing investment strategies for the real estate sector overall has already become considerably trickier.
Focus on independence
For investors, takeovers and mergers are making the market more transparent and easier to survey. On the other hand, consolidation increases the risk that real estate investment managers might lose their independence and become enmeshed in conflicts of interest. If they’re part of a large corporate group, they may have to sell products that primarily benefit the group rather than the client. In cases like this, advising clients independently isn’t possible.
Independent owner-managed investment companies, on the other hand, act in the investors’ interest: they selectively target investments that offer their clients attractive opportunities for investment, diversification, and returns.
International and local
By taking over Rockspring, TRIUVA, and Sparinvest Property Investors, PATRIZIA has expanded its market position as a global provider of real estate investments in Europe and has further internationalised its business. As a result of these strategic acquisitions, real estate investors now have access to a broader range of products, and they can make even better investments throughout Europe in new markets, asset classes, and risk profiles. That means that while PATRIZIA remains locally positioned, with experts on location, it can also offer real estate investments all over Europe in a global context.