Thematic growth strategies

Net inflows of capital will drive global maturation of sector business models

Amid a slower-growth environment overall globally, investors will focus on the relative outperformers. This relates to sectors, geographies and business models that are in the path of growth, whether structural or cyclical. Opportunities are emerging now in real estate’s growth sectors and will continue evolving through the next cycle.

Investors will continue to focus on sectors that are less mature across markets in terms of share of investment, such as logistics and living. And beyond that, key alternative sectors such as data centers and life sciences are on global investors’ roadmap. This reallocation will present an opportunity for diversified, stable income streams and higher returns.

Global investors’ thematic growth strategies span the following:

Industrial & Logistics

Logistics will grow globally driven by structural and behavioural shifts in consumer patterns and increasing reliance on supply chains. Near-shoring and the need for domestic supply chain resilience will create further opportunities in more developed logistics markets: In North America with particular growth in manufacturing, in Europe driven by urban logistics, and in Asia-Pacific the continuing e-commerce boom amid urbanization and dense large population centres. The increasing importance and resilience of supply chains will impact all markets.

Living

The living sector is experiencing growth for many reasons. Global populations are growing and becoming more urban, meaning cities require more homes, with a broader range of household types and sizes needed. Innovative living solutions will provide some new supply to meet this demand. Further institutionalization of the sector will be driven by Japan, China and Australia in Asia-Pacific, and parts of Europe including the UK, France, Spain and Italy, where market maturity remains well below the current levels of the US and Canada. Capacity for institutional beds is high and supply is low, creating significant opportunity. Student housing and single-family rental will also be growth areas.

Data Centers

Data center development and investment are currently dominated by specialist players, but large institutional, cross-sector investors are increasingly seeking exposure due to long-term growth potential. Cloud-based data storage and processing are growing consistently, and AI adoption is accelerating this, but growth is currently limited by supply shortages.

Life Sciences

The focus on life sciences was accelerated by COVID-19 – evident in the exponential growth in life science real estate investment over recent years, particularly in both the US and UK. This sits within broader categories of science & technology / research & development but has gained significant traction. Now, life sciences may be a beneficiary of office repurposing, with a strong potential development pipeline in many global markets. However, a limiting factor for growth could be funding; global VC fundraising has slowed significantly this year. Despite this, large funds still have record dry powder, so optimism remains that start-ups will continue to access finance in their drive for continued growth.

Longer-term targets: infrastructure and advanced manufacturing

New opportunities will emerge with technological and societal shifts, as CRE deepens further and expands into new areas. With many cities and companies shifting to cleaner energy solutions, there is growing need for manufacturing, distribution, and infrastructure for solar, wind, and hydro networks. Demand for renewable energy real estate assets has been on a significant upward trend, and climate targets are mandating that half of all buildings’ used energy will come from renewable sources.

The energy transition extends beyond buildings: The surge in electric vehicle usage has escalated the need for supporting infrastructure, requiring not only a substantial expansion of the current public charging stations and a considerable investment in battery manufacturing facilities.

And the growth of advanced manufacturing for robotics, automation, nanotechnology and many other sectors will increase demand for facilities for research & development, manufacturing and distribution. Real estate will undoubtedly develop to support the future commercialization of these and other new technologies.

Growing focus on operators

Beyond the sectoral strategies covered in the above, the way capital is deployed will continue to adjust in a competitive and higher cost of capital environment. Not only will investors continue to participate throughout the capital stack as lending markets stabilize, but a broader set of strategies, both direct and indirect, will be explored.

The current challenging capital market environment and the focus on building long-term assets under management (AUM) has triggered a focus on new investment strategies: Partnerships with operators, whether it be through joint ventures, recapitalizations, platform acquisitions, or other structures, are particularly in focus.

Over the past five years, joint ventures have become a major component of the global real estate market, with between around 10 - 20% of all real estate deals involving some form of joint venture. Investors are increasingly directing their capital towards joint ventures, especially in sectors where access to deal flow is highly competitive. Joint ventures in the logistics and living sectors have grown meaningfully, allowing investors access to more deal flow, expertise, risk management, and scale, and this trend is expected to continue and intensify.