State of the real estate market: Patient investors’ long-term strategies will be rewarded
13 / 05 / 26 - 5 minute read
A world in transition experiencing permacrisis continues to be lived out. The latest shock to the system was the Iran war, through which an immediate impact was felt at MIPIM and continues to loom large over society and the real estate industry.
This world which is punctured regularly with geopolitical shocks was one we anticipated in the wake of the COVID-19 pandemic and led to PATRIZIA devising its “DUEL” megatrend investment thesis, i.e. an investment thesis aligned with the ongoing Digital, Urban, Energy and Living transitions.
This investment thesis has been embedded into our operations for the past few years and guides our work in the medium term. It views investment with a long-term lens to better hedge against the short-term effects of a volatile geopolitical environment and is prescient as I share some thoughts on the current state of the real estate market a third of the way through 2026, following many discussions with investors, attendance at industry events and my own experiences as Co-Head of Fund Management and Head of Fund Management Real Estate at PATRIZIA.
Patient capital will be rewarded in the long run
Mahdi in Cannes for MIPIM
With an investment thesis very much focused on the long term, while short-term bets are more vulnerable to the short bursts of negative events, we are focused on patient capital and pacing risk around the strongest recovery components of the market.
That’s not to say that we believe allocations should be held back or waiting for an elusive “perfect moment”. The windows of opportunity to invest in the right assets at the right time still apply – but we see the best returns in longer-term strategies with real estate investment less susceptible to the negative impacts of geopolitical volatility than many other asset classes.
One example of taking a longer-term approach to real estate investing applies to housing with multi-year programmes needed to realise the best outcomes, particularly in relation to forward-funding schemes. Deployment timelines are extending and we would advocate investment into the living sector now which will mature attractively in the medium term.
With wider uncertainty in capital markets, real estate investment in the right sectors offers reliable opportunities to generate some of the strongest returns in more than a decade.
AI: Potential in upgrading from experimentation to execution
There is no doubt that geopolitical volatility remains the number one talking point for investors right now; but AI is not far behind in investors’ minds.
The AI boom is a systematic discussion point for real asset investors as it is showing no signs of slowing down, with AI investment responsible for a huge proportion of GDP growth and stock market performance in the USA, where widespread implementation is being aggressively targeted, associated with long-dated payouts.
But, despite widespread adoption and piloting of AI tools by real estate firms, a recent survey revealed that only around 1-in-20 of these companies have embedded AI operationally.
The foundation is being laid for huge advances across the industry through AI integration thanks to significant investment supporting the technology, but there is an operational lag which provides an opportunity for those more advanced to storm ahead of the competition.
We have been using data insights at PATRIZIA for 20 years, with AI currently being used, for example, to fuel our market intelligence, predict valuation movements and automate underwriting and reporting. Data is scrutinised by our real estate experts while hypotheses are tested by AI-driven software to ensure systematic and thorough analysis of investment opportunities.
Evolving nature of the drivers of real estate investment performance
At PATRIZIA, we focus on generating alpha through asset selection, repositioning and execution, rather than relying on financial engineering. For example, over the past 20 years, our value-add fund series have not exceeded leverage levels of 40-45% when most competitors went above 55-60%.
The higher cost of capital for both equity and debt has reinforced a shift in the market towards asset-level performance and deal structuring. We are comfortable with this. Leverage is no longer the main driver of IRR bridges, so the focus is on reversionary potential, income growth and asset quality to minimise capex leakage.
Financing constraints have not fundamentally changed our approach, but they have increased the importance of execution and capital discipline.
As for funding structures, we have always used a range of structures, including joint ventures and preferred equity, particularly in value-add and forward-funding strategies.
We believe the current environment is creating more opportunities to deploy these structures, especially in residential and other living segments where financing constraints are impacting development activity and rapidly reducing supply. This allows us to partner selectively, with strong alignment and downside protection, while creating value through disciplined execution.
Living leading the way
Berlin, where PATRIZIA is developing 2,000 residential units as part of a new EUR 500 million programme
A structurally strong sector, the living sector remains the dominant real estate investment opportunity right now.
Society at large recognises that in a record number of countries there is a global housing crisis, and public and private capital can help address this as part of the Living transition megatrend.
We are addressing the housing crisis on behalf of our investors in a variety of different markets and through different strategies. Take our EUR 500 million programme in Berlin where we are developing 2,000 residential units, our acquisition of a prime residential portfolio in Tokyo or our GBP 100 million investment into London delivering sustainable, affordable and alternative housing solutions to tackle the UK capital’s acute housing shortage.
We are addressing the housing crisis, and our living platform, backed by 42 years of residential investment expertise, around 200 in-house professionals and with EUR 18 billion assets under management, remains nimble and agile to find the best opportunities in the sector for our capital partners.
This conviction in the strength of the sector is shared by investors, with affordable housing and impact increasingly higher on their lists of preferred strategies.
Impact strategies are gaining credibility and crucially, national and regional governments are increasingly coming on board to work with private capital and deliver housing which is so badly needed. In addition to governments and real estate investors focusing on housing provision, infrastructure investors are also becoming a bigger part of the picture, via the social infrastructure angle.
Selective opportunities in other real estate sectors
While the investable universe in living is a large and attractive one, opportunities elsewhere remain but on a more selective basis.
Industrial and logistics are adapting well to supply chain challenges. Office is facing a difficult challenge, with capital scarce and very selective, but the sector is regaining traction. Noticeable at MIPIM was the increase in conversations on the sector compared to the last few years.
In retail, we are focused on food-anchored, necessity retail which is on an upward curve thanks to its inflation linkages and attractive entry yields.
Debt market becoming more crowded
There is currently an ample supply of debt in Europe. There is a reasonably ample choice from existing and new lenders, with the new entrants disrupting the debt market and some lenders becoming more competitive on pricing and terms.
Despite this vibrant debt lending environment, the selectivity elsewhere in the real estate market applies here too, with borrower quality and asset type firmly under scrutiny from lenders.
Scenario-planning for success
Like any investment manager carrying out its fiduciary duty and supported by cutting-edge research, we plan scenarios to test our investment theses. In this world in transition beset by permacrises, the number of scenarios to envisage is bigger than perhaps in previous cycles, but this testing adds a further layer of scrutiny (and comfort) before moving ahead with our investments.
With our “DUEL” megatrend investment thesis executed by our expert teams with years of experience behind them and a research and data intelligence component delivering critical insights, we remain patient and fully focused on delivering value for our investors in this fluid market environment.
