Investors are increasing their allocation to real estate which has caused a supply and demand mismatch sparking concerns that risks in the sector are mounting.

Speaking at Investment Magazine’s Real Estate Conference, Justin Curlow, AXA Investment Management’s global head of research & strategy real assets, said the weight of capital targeting the asset class is far outstripping the annual volume of transactions putting property yields under renewed pressure this year.

“Something has got to give effectively – likely pricing – and we expect to see property yields across regions and sectors to continue to converge as investors search for yield wherever it can be found,” he said. He added that property yields should not fall foo far below 3 per cent –  and definitely not below 2 per cent  –  as the ongoing cost of capex to maintain income generation should provide a floor.

Curlow said competition for deals is driving both asset and submarket level ‘risk creep’ as investors are increasingly willing to accept more property level risks in order to put capital to work.

The property specialist highlighted the structural and demographic shifts that are reshaping the economic landscape and offering property investors a defensive late cycle investment play. “When we talk about structural change, we are talking about the ongoing disruption in retail which is driving a structural shift in logistics demand to build out the supply chain infrastructure necessary to operate an omni-channel business,” he said.

“In addition, there are demographic and urbanisation trends that are reshaping major city landscapes and driving strong demand for a variety of residential property types.

“As new supply has not been able to keep up with this spike in demand, we expect the sector to continue to benefit from strong rent growth while offering investors an attractive relative value trade underpinned by the defensive income stream priced at a narrower yield spread to other property types following the yield convergence occurring across most markets.”

AXA is looking for alternative sectors that are less aligned with the business cycle.  “In this market context, we continue to look towards size and/or complexity to find investments where there is less competition.”

The strategist is also looking at other thematics like demographics and the new property types.

“There’s been an absolute dearth of supply over the last decade and that is changing the way people are interacting with buildings so there is a great opportunity to build new real estate even if the fundamentals are not great.  “You don’t need growth if the type of real estate demanded is not catered to by existing stock. The new property types cater to new way of engaging with buildings.”

AXA is active across tall four quadrants of real estate – private markets, public markets, debt and equity. “It’s very important to have visibility up and down the capital stack and across public to private as it’s a pretty inefficient sector still,” he said.

During the Conference, Curlow said given the weight of capital invested in real estate and the appetite, investors should assess what is strategic and what will remain viable over the next 5, 10 and 15 years and consider offloading non-strategic assets. “There is not a better market to sell into,” he said


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