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Exploring the motivations ofinvestors in real estate

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Contents
Introduction

3

Direct, non-listed, real estate funds and segregated accounts

4

Private-market vehicles

6

Listed real estate and REIT funds

7

Indirect real estate, multi-manager funds

8

Closed-ended, listed, multi-sector strategies

9

Closed-ended, listed, specialist strategies (logistics)

10

Living real estate sectors

11

Commercial real estate debt

12

The perspective from Asia

13

Exploring the motivations of investors in real estate2

Introduction

Neil Slater
Global Head of Real Assets

Our investors are motivated to achieve a range of outcomes, with multiple factors influencing
their decisions. From setting asset allocations, to navigating financial and economic market
conditions, the considerations are infinite. Some of the big challenges have some degree ofcommonality and yet few investors can find a silver bullet to deliver their desired outcome inthe long run. For many investors in real estate, their allocation is just part of a broader suite ofinvestments that create an outcome that is greater than the sum of its parts.
Investors have a significant opportunity to fulfil a broad
spectrum of objectives through real estate allocations.
While rented buildings offer a simple capital and income
return for those investing in the physical property, there
are many other ways that investors can access returns
derived from underlying properties.
In the following paper, there are three common factorsthat are influencing our clients’ decision-making process.
These are:
1. Risk, reward and return dynamics. This is the mostimportant factor as the investor risk and return
requirement ultimately has to be met for an allocation
to deliver for the client. Real estate has the benefit
of offering both capital and income returns. This key
quality means it has a low correlation with both bondsand equities, and can offer the diversification benefits
many investors are looking for. However, every accesspoint to the asset class carries differing levels of risk
exposure, and not every fund is a suitable solution.
2. Scale. Not all investors have the funds needed toaccumulate their own diversified balanced portfolio.
Others don’t have the in-house expertise to source
assets, develop them, and manage a strategy overtime. They need to rely on specialist managers to dothat. As a result, some vehicles will work better for somethan for others.
3. Market performance drivers. The market matters– all of the contributors to this paper talked of thefundamentals underpinning the decision-making
within their vehicles. Tenant demand; supply pipelines;
liquidity; climate risk; environmental, social andgovernance (ESG) factors; and other regulations all
influence performance and investors’ appetite. Without
understanding what is driving fundamental real estaterisk and returns, investor motivations will not be met.
Exploring the motivations of investors in real estate

Of these three factors, risk appetite is the aspect that
dictates the route into real estate for many investors.
Long-term investments or liability-matching capital witha low risk appetite might prefer direct, long-income funds.
They may also prefer credit funds with lower volatility
characteristics but with less liquidity. Those with higher
risk appetites or greater liquidity needs could find more
appropriate opportunities in the indirect parts of the realestate universe.
In this paper, we have asked our teams to consider
market conditions and what drives their clients to invest in
their vehicles. There are several key options for investors
covered by this paper and by the abrdn real estatebusiness.
. Direct funds or segregated accounts offer institutional
investors long-term options across different
geographies, sectors or risk profiles, but with generally
lower levels of liquidity.
. Listed real estate funds offer investors more liquidity but

more volatile performance. They are correlated moreclosely with equity markets in the short term, but with theperformance of directly held assets over the long term.

. Closed-ended, listed, real estate trusts (mainly real estate
investment trusts (REITs)) offer investors direct access tounderlying portfolios of assets (balanced or specialist)
and asset management expertise.
. Multi-manager vehicles provide investors with accessto underlying real estate returns, but with the ability to
trade in and out of funds at the unit price, which moves
independently to underlying valuations.

. Commercial real estate debt is increasingly offered by
non-bank lenders. This offers investors another way
to gain exposure to real estate assets, but with a morepredictable cashflow and a diversified source of risk.
3

Direct, non-listed,
real estate funds
and segregatedaccounts

Veronica Gallo Alvarez
Head of Core European Funds. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Investible universe size:$11 trillion.
. The purest form of real estate
investing, with direct accessto the underlying asset
performance.
. Range of risk strategies
available, from long-income
funds to opportunistic
vehicles.
. Physical assets carryobsolescence risk because ofmajor structural change, butthere are also opportunities.

Direct real estate allows institutions, pension funds, insurers
and private investors to access long-term consistent cashflows
from rental agreements with tenants. Asset values can also
appreciate over time with active management, and increase or
decrease through market forces. The markets move much more
slowly than equities, as valuations are carried out on a monthly,quarterly or annual basis. This has a smoothing effect on returns.
Direct real estate sits between bonds and equities in terms of risk,
offering both income and growth characteristics, and a range ofrisk-and-reward styles to suit investors’ objectives. Liquidity canvary depending on the fund structure, the depth of the investment
market, and because of the real estate cycle. Direct investments
are most suited to long-term investors.
As we know, ‘past performance is not a guide to future results’and the drivers of real estate are changing faster than ever.
The pandemic accelerated technological, regulatory andbehavioural change at an unprecedented speed. This is a huge
moment for physical assets as they are not easily or cheaply
adapted to become future-fit.
Direct real estate funds need to move with the times. People are
increasingly opting for rental housing, and workers want officesthat are collaborative spaces and full of amenities. Families andcompanies are consuming differently now, which is resulting in
new chains of distribution. Standing still in a world of change is
not possible.
The asset class faces challenges on the pathway to becoming
sustainable and future-fit too. ESG is increasingly the number
one factor in deriving both risk and reward (brown discounts andgreen premiums are increasingly evident) for direct real estate.
New legislation, such as the Sustainable Finance Disclosure
Regulation (SFDR) around minimum energy performancecertificates (EPCs) and the potential new EU Energy Performanceof Buildings Directive, will accelerate the need for landlords todecarbonise and meet net-zero targets.
We believe these challenges are also an opportunity tocreate value for our clients in different ways: repositioning theportfolios to be ready to capture future growth and focusing on
structural themes that will provide resilience in the long term.
This includes investing to create future-fit real estate, or investingin opportunities generated by tenants’ requirements and the lackof development financing.
So how are investors reacting to this? We have noticed a clear
shift in investors’ appetite towards thematic and specialist
investment strategies (such as residential or living strategies;
logistics; and risk strategies, such as value-add offices).
We also see our clients becoming more sophisticated from arisk perspective, often choosing to allocate a proportion of theircapital across the risk spectrum (including long-income funds)
and to specialist strategies. Long-income funds offer a lower levelof volatility and a more stable cashflow. This can be appealing
for insurance clients, in particular, given Solvency II capitalrequirements (SCR). You can read more about this here.
Others are seeking more interesting opportunities with higher
risk-and-return profiles.

Exploring the motivations of investors in real estate4

International investors often look at direct property investments
and funds to add diversification to their existing domestic
portfolios. Some are looking at long-term fund allocations andothers are more tactical in their approach, taking advantage ofmispricing across global markets. From a tactical perspective,
cross-border investors can be motivated by relative value fromdifferent cycles, currency effects, the cost of debt from one
country to the next, and the overall return potential from individual
assets or from funds. Many of our clients are interested in scaleand opportunities to ‘step-in’ to debt or equity shortfall situations
alongside other investors, if the return potential and entry priceare attractive enough. Many look to engage with overseas
managers with local presence, access to pools of co-investment,
scale, in-house expertise and a pipeline of opportunities, as thisis not necessarily cost effective for them to establish themselves.
Transaction fees, structuring costs and tax are more importantfactors for many of these investors, given the complexityof investing internationally – although these factors can beovercome with the right expertise.
abrdn offers a suite of multi-sector portfolios across the UK andEurope, providing different risk profiles to our clients. We offer
counter-cyclical, long-income strategies; core portfolios thatprovide resilient and moderate returns; core-plus portfolios that
seek to extract higher returns through active asset management;
value-add strategies that focus on creating value from higher
risk assets; and sector-specific investments. All our strategies
are research-driven, following a thorough investment process.
There is a particular focus on ESG and structural themes, which
we believe are increasingly important motivations for our investor
base too.

Exploring the motivations of investors in real estate5

Private-market
vehiclesNic Baddeley
Investment Manager,
Private Markets. Low correlations with otherprivate- and public-market
assets.
. Real estate provides accessto thematics and long-term
drivers of growth.
. Predictable real estate
cashflows can be used tobalance other risk positionsin the portfolio.

As a multi-asset private-market portfolio manager, real estate as
an asset class is attractive for three main reasons. Firstly, it has a
low correlation with other asset classes, both public and private.
Secondly, it can clearly be linked to one of our three key driversof long-term growth. Finally, core real estate assets can havebroadly predictable cashflow profiles, allowing us to service future
capital calls from our other investments.
To expand on the first point, both the value-add and opportunistic
real estate segments have a low historic correlation with theother asset classes in our portfolios, in both the public andprivate universes.1 Most interestingly, real estate has a low
correlation with other ‘real asset’ classes, namely infrastructureand natural resources, despite having similar inflation protection
characteristics. This means an allocation to real estate in our
portfolio can have a diversifying effect, which improves the overall
risk/return profile.
Secondly, real estate can be linked to one of our three key
drivers of long-term growth. These are three trends, not linked
to business and economic cycles, that we expect to drive longterm investment performance. By aligning our investments tothese trends, we will benefit over the seven-year period ourfunds aim to outperform over. The three trends are technologicaldisruption, sustainability, and demographic shifts. While
technological disruption and sustainability can be linked to realestate (e.g. data centres to support the shift to cloud computing,and sustainability-aware building practices), it is demographic
shifts where we see the largest potential. This megatrend
manifests itself in an ageing Western population, a rising Asian
middle-class, and increased urbanisation globally. This meansincreased demand for assisted-living assets in the West, logistics
warehouses to support ecommerce spending in Asia, and fringe
central business district (CBD) properties globally, which areaccessible to real estate investors.
Finally, we have made commitments in our portfolios toinvestments in other assets classes, through primary fundinvestments in private equity, venture capital, and private credit.
A real estate investment that pays a regular predictable yield isvital in our portfolios. We can gain from capital growth from theasset, but also know that cash will be coming back at regularintervals, which we can use to service future capital calls fromother asset classes.

1

Source: abrdn, Preqin, Bloomberg, period from December
2000 to December 2021.

Exploring the motivations of investors in real estate6

Listed real estate
and REIT funds

Valerie Jacob
Fund Manager,
Indirect Real Assets. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Total global REIT market cap:
$1.9 trillion (according to
FTSE EPRA NAREIT,
February 2023).
. Long-term link to real estate
performance but short-term
volatility is higher.
. Overshoots the direct market
peaks and troughs, creating
opportunities throughmispricing.
. Opportunity to rebalance
portfolios to capturethematic trends as
they emerge.

Funds investing in listed real estate property companies (often
REITs) offer investors a more liquid, but more volatile option to
direct real estate. Data shows that the correlation between direct
real estate returns and listed real estate market performanceis very weak on a short-term basis (the short-term correlation
with equities is stronger). The relationship strengthens overlonger durations, though, given the importance of real estate
fundamentals in driving REIT performance. The listed market
provides a fairly accurate guide to turning points in the direct
market, with a six- to nine-month lag.
The current market uncertainty and significant dispersion in
performance are creating a wealth of opportunities for active
listed real estate investors. There are three key reasons why webelieve 2023 will be a stronger year for funds investing in listed
real estate.
Firstly, current expectations of a Federal Reserve (Fed) ‘pivot’in 2023 bode well for the listed sector’s performance in 2023.
Secondly, history shows that listed real estate tends to perform
well following the end of a rate-hiking cycle. Thirdly, REIT values
have adjusted ahead of the direct real estate market and stocks
are now trading at large discounts to spot net asset values (NAVs).
Our estimates suggest that valuations for the pan-European realestate sector already reflect an average 20% drop in asset values.
This is above what we expect to be reported by companies as thelisted sector tends to exaggerate direct valuation moves on theway up and on the way down. The listed pan-European
listed sector currently offers an attractive entry point for
long-term investors.
But not all REITs are equal and opportunities vary significantly byregion, sub-sector and company. In the short term, vulnerable
balance sheets remain the number one risk in the listed realestate sector. Declining asset values will push up loan-to-value(LTV) ratios. This will force some companies to cut dividends,
dispose of assets — possibly at a discount to their current
valuation — or even raise new equity to avoid breaching their debt
covenants. We have seen some examples of this balance-sheet
remediation and it is likely to accelerate in 2023.
These events create volatility but also opportunities. Debt
refinancing will also result in higher interest rates and will affectcashflow growth. Companies that cannot capture inflation in theirrental income — either through indexation, reversion or market
growth — will be particularly sensitive to changes in cashflows.
On the positive side, we expect companies with strong balance
sheets to take advantage of weaker prices for direct assets andinvest to enhance their returns.
Structural market disruptors, such as demographic change,
ecommerce, onshoring, and sustainability are expected to further
polarise sector performance. REITs exposed to the right assets will
be able to benefit from increased demand, income growth andrising asset values.
These structural trends and the pricing backdrop offer exciting
new opportunities for active thematic investors. Although passive
investments (such as benchmark trackers with low managementfees) have been popular in recent years, the drivers of
performance have shifted so significantly in real estate thatinvestors should think twice about accepting index performance.
Active investing across themes can target growth areas and help
investors to avoid the downside risks in many listed
property companies.

Exploring the motivations of investors in real estate7

Indirect real estate,
multi-manager funds

Multi-managers offer investors diversified exposure to realestate by providing access to closed-ended, real estate funds.
This allows investors the opportunity to gain exposure to both
specialist sectors and managers, with a smaller equity exposure
than would typically be required directly. Units of these funds aretraded on the secondaries market and often at a discount to NAV,
with unit prices moving independently to underlying
asset valuations.
Against the current context of falling real estate capital values,
existing portfolios are likely to experience poor performance inthe short term. As a result, we would expect to see an increase involumes throughout the early part of 2023.

Mark Wilkins
Head of Real Estate
Multi-Manager. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Multi-managers provide
efficient exposure to
global real estate and withgreater liquidity than direct
investments.
. Opportunity to invest at agreater discount and at
higher investment yields
than before.
. Greater volumes ofsecondaries are anticipatedin the early part of 2023.

However, this scenario will provide unique opportunities,
particularly for funds that have recently launched, or are in
the process of launching. These funds should be able to target
investments at a greater discount and higher income yieldthan have historically been available. They should also be wellpositioned to benefit from a future recovery in real estate pricing.
As a result, we expect to see some exciting investment prospects,
particularly for funds targeting stressed and distressed situations.
This is borne out by the number of fund launches we are seeing
across several developed markets globally. These vehicles arelikely to target debt and equity investment, with a focus on goodquality real estate. There is an increased focus on those sectorsthat are supported by structural and demographic growth drivers(such as senior living, residential, data centres and the specialist
industrial/logistic sectors). Operational real estate continues tocome into greater investor focus and we expect demand forthese sectors to increase in the year ahead.
Traditionally, the sector has been monopolised by institutional
investors, and wholesale clients have been unable to readily
access private real estate markets. But this appears to bechanging. The wholesale market is diversifying into global realestate in search of attractive returns, predictable incomes andthe low correlation.
In light of this, all major opportunistic global managers (includingBlackstone, Brookfield and Fortress) are focused on raising
equity from wholesale investors, and particularly clients of wealthmanagers and private banks. They are trying to gain accessto what is likely to be an exciting short-term opportunity, as
discounts adjust once real estate capital values feed through tofund NAVs.
Real estate multi-managers often screen hundreds of investment
opportunities across the globe each year and provide investors
with the opportunity to access not only fund investments, but also
co-investments, clubs and secondaries. This provides greater
scope for real estate investors.

Exploring the motivations of investors in real estate8

Closed-ended,
listed, multisector strategies

Jason Baggaley
Deputy Head of Real Estate
Value-Add Funds. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Efficient route into active
asset management of large
assets, specialist skills andportfolio construction.
. Share price movement
can overshoot underlying
asset values, which creates
opportunities.
. Best prospects are inlogistics and living sectors,
and more vehicles will beallocating outside traditionalcommercial sectors.

Diversified REITs can offer investors the ability to gain a broad
exposure to real estate, without the high cost and low liquidity thatinvestment in direct real estate demands. As the name suggests,
these professionally managed funds have provided a diversified
exposure to more traditional real estate sectors. But as the realestate market changes, funds have been targeting greater
weightings in alternative and operational sectors of the market.
While performance can be more volatile than direct investments(because of share price movements), investors are often
motivated by the distribution yields. REIT legislation requires funds
to distribute at least 90% of the net rental income to investors.
This can be appealing for private investors and wealth managers
who are looking for cash returns for their clients.
Given negative news and falling real estate capital values in thesecond half of 2022, it is not surprising that many retail investors
were not actively investing and that fund flows were negative.
What has been remarkable, though, is the speed of correction in
the UK commercial property market. Global real estate has rerated to reflect increased gilt yields and higher interest rates. Even
though the interest-rate cycle might be reaching its peak, further
price corrections are expected in the first half of 2023.
The greatest movement in values has been within the logistics
sector, but we expect prices to stabilise during the first quarterof 2023. Offices have further to fall over the course of 2023 as
structural pressures weigh on the sector. Retail has historically
been negatively affected during a recession so caution is requiredin this sector, despite the high yields.
Despite the obvious challenges, there are some positive signs andattractive opportunities. Two sectors stand out: living and logistics.
A positive supply/demand dynamic remains in the logistics
sector. Supply is likely to remain restricted in the medium term,
given limited development and the advent of ‘onshoring’ inresponse to disrupted supply chains. Rental value growth remains
likely, particularly for good-quality accommodation. And therapid repricing of logistics assets should allow this sector toperform well over the next three years.
Within the UK, many cities have a shortage of purpose-built
student accommodation (PBSA) and demographic trends
suggest growing demand for university places over the next few
years. Similarly, good-quality private rented accommodation is in
short supply and there is an increasing number of people trying
to rent. This may be in response to a desire for greater flexibility
or because they simply cannot afford to buy — an issue currently
exacerbated by the cost-of-living crisis.
As the economic environment has weakened, there havebeen significant discounts to NAVs in the real estate investmentcompany sector, which have often outpaced direct real estate
capital value declines. As a result, the unique opportunity to invest
in the real estate sector, at wide discounts and at higher yields
than were previously possible, is likely to attract retail investors
in 2023. While this relates to the current market cycle, it clearlyhighlights one of the key motivations for our investors — timing.

Exploring the motivations of investors in real estate9

Closed-ended,
listed, specialist
strategies (logistics)

Phil Redding
Fund Manager,Tritax. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Investors benefit from
specialist management
expertise, large opportunities
and high-quality portfolios.
. Modern logistics buildings
offer strong ESG credentials
and benefit from structural
demand trends.
. Liquidity, diversification,
scale and price transparency
are the key motivations forinvestors in listed logistics
funds.

Exploring the motivations of investors in real estate

There are a number of reasons why investors target logistics.
Some are attracted to the resilient income that larger-scale
logistics offers, which comes from long-dated leases to large
and robust customers. Others are seeking the associated value
growth that comes from owning assets that are in short supply.
For a growing number of investors, modern logistics assets aresome of the strongest assets to own in terms of ESG credentials.
Investors in logistics are achieving exposure to a real asset thathas strong and enduring structural support.
We all recognise that the way we live, work and consume ischanging — and logistics is at the heart of this change. When you
factor in increasing geo-political uncertainty, supply chains mustalso become more flexible and resilient. Again, this increases thelong-term demand for logistics space.
Owning logistics assets through listed funds that are run by aspecialist manager provides the additional benefits of liquidity,
diversification, scale and price transparency. This enables
investors to carefully manage their exposure, by easily and costeffectively reweighting their holding as required. Investors canalso benefit from the associated cost-efficiency that is inherent
to a well-run listed vehicle that specialises in such assets. Tritax’s
competitive advantage comes from our reputation and ourrelationships within the logistics property market.
The occupational market for logistics is in good health, withdemand outstripping supply in most places. This is because
companies are making long-term decisions around their supply
chains, given the importance to their businesses. The need forcompanies to optimise, reinforce, and de-risk their supply chains
to boost productivity and to ensure efficiency and resilience
remains a key driver of demand.
This has resulted in higher levels of take-up, strong market
fundamentals and healthy rental growth. Market fundamentals
will not be immune to the weakening macro-economic backdrop
in the future. But coming from a position of exceptional strength,
and supported by long-term structural trends, we believe they willremain healthy by historic standards and attractive to investors.

10Living realestate sectors

Marc Pamin
Head of Residential Real Estate. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Long-term cashflows, withdiversified demand drivers
compared with commercial
sectors.
. Invests in the private rented
sector, shorter-term
lets, senior living, student
accommodation,and co-living .
. Regulation is changing, so
underwriting cashflows
accurately is crucial.

Investible ‘living’ real estate sectors have developed at an
extraordinary pace in Europe in recent years. Private rented
residential (PRS) and build-to-rent (BtR) are only two aspects of amuch bigger story. The private rented cornerstone of the market
is joined by purpose-built student accommodation (PBSA),
serviced apartments and various forms of co-living. The key thingis that the sector offers something for all investors across the risk
spectrum. Some investments provide risk exposure to underlying
leasing conditions, while some operational forms of residential
involve long-term, index-linked rental contracts with operators.
Most European countries are seeing a gradual increase inbespoke multi-family accommodation, as it evolves to become
an important component of housing supply. But other than
Germany, the Netherlands, parts of the Nordics, and Switzerland,
most countries are still at an early phase of the rented housing
market evolution.
Institutional investors are a growing part of the residential
investment market, as the required portfolio scale becomes moreobtainable. In Europe, residential real estate has moved from a
0% allocation in the INREV European funds ODCE index in 2018
to 15% in 2022. This shows that it is not just specialist investors
who are targeting this space — residential is now seen as a major
component of the investible market for balanced
funds too.
The global megatrend of urbanisation was significantly tested
during the pandemic. Since the vaccine roll-out and the removalof restrictions, people have flooded back to urban areas to live,
work and play. With comparably high interest rates, particularly
for development financing, the demand/supply imbalance ofrental stock continues to widen. Forecasts suggest even fewer
homes will be developed.
This can only mean two things for residential. Firstly, the tenant
churn in assets will fall. This means that households will stay intheir apartments, given the lack of alternatives or because they
are protected by partial rent control. Secondly, rents will increasein the free-market segment and in areas with constrained
supply. This will encourage even more capital into the sector
and showcase that investing in residential can offer low volatility
and resilience. Rent regulation is an ongoing factor, but webelieve that if properly implemented, it will support the long-termsustainability of cashflows from the sector.
For PBSA, senior living and co-living, the demographic changes in
Europe’s population will also play a big role in the outperformanceof these segments. There is simply not enough suitable space foran ageing population in Europe. After a financial or economiccrisis, student enrolment in universities typically increases too.
In a sector that already has a huge imbalance of demand oversupply, universities are turning students away because of the lackof housing.
The modern and efficient buildings behind the living universe offer
great opportunities for investors. They can access long-term,
index-linked cashflows with strong diversification benefits,
when compared with commercial real estate. Demographic
shifts and urbanisation trends can offer returns in a stable andresilient asset class.

Exploring the motivations of investors in real estate11Commercial realestate debt

Neil Odom-Haslet
Head of Commercial
Real Estate Lending. Typical investors: institutions,private investors, wealthmanagers and international
capital.
. Consistent, quarterly
cashflows.
. Diversifies risk, yet backed byunderlying real estate assets.
. Appealing yields, relative toother fixed-income assets,
especially in the wake ofre-pricing in real estate.

Commercial real estate debt funds allow investors to buy
into consistent cashflows from interest paid on loans that are
secured against commercial real estate assets. The cashflows
are not influenced by changing real estate market conditionsin the same way that rental payments can be for direct realestate investments. Instead, the risk underwriting is based on thequality and nature of the underlying asset, the tenants, and thecreditworthiness of the borrower.
The current market environment is creating an increasingly
attractive opportunity for commercial real estate debt acrosssenior and mezzanine strategies. Against a backdrop of a steep
decline in capital values in the second half of 2022 and a material
increase in interest rates, this will lead to distress across loan
portfolios — particularly for refinancing in 2023 and into 2024.
Faced with this sharp decline in capital values and significant
increases in interest rates, traditional bank lenders are now
focusing their time and capital on refinancing existing loans
and repairing their balance sheets. As a result, there is aweaker appetite for new lending opportunities. This lower levelof competition (bank lenders still account for 60% of the UK
lending market) has already led to a reduction in LTV ratios
and an increase in loan margins. LTV ratios have reduced fromapproximately 60% to 50%, while pricing has increased by 15 to
25 basis points (bps) for the best-in-class deals, and significantly(75 to 150 bps) thereafter.2
Non-bank lenders, with no portfolio distress and with capital tolend (such as abrdn), will be able to capitalise on the lower levelsof competition to secure attractive deals, which can offer acompelling risk-adjusted return. This diversity of capital sources
is now an established feature of the lending market in the UK.
It should ensure that capital is available to support real estate
acquisitions in almost all market environments, albeit at a price.
From the non-bank lenders’ perspective, lending at lower
leverage levels against an asset that has already reduced
significantly in value presents an attractive opportunity from arisk perspective. Increased margins and significantly higher baserates combine to deliver a level of total return that is significantly
higher than long-term averages.
Investors are increasingly attracted to the asset as it offers
diversification from traditional fixed-income products. It is
defensive, asset-backed and provides quarterly coupons. Given
these factors, we currently see strong interest from investors instrategies targeting investment-grade senior loans in the UK.

2

Source: Bayes Business School H1 2022 report.

Exploring the motivations of investors in real estate

12The perspectivefrom Asia

The broad range of economic development in the Asia-Pacificregion provides investors with multiple opportunities to invest
across the risk spectrum, and to gain exposure to broad thematic
growth. From the emerging markets of India and South-East Asia
to the core markets of Australia, Japan and South Korea, investors
have options to meet all risk budgets and to access importantinvestment themes.
The Asian market is reacting to shifting policy and economic
conditions, and investors have a wealth of opportunities to explore
across the region. We believe there are particularly interesting
opportunities emerging in South Korea, Japan, Singapore
and Australia.

Paul Lee
Head of Direct Real Estate,
Asia Pacific and Korea. Where there is risk there isopportunity — strategies tomatch prospects acrossthe region.
. A deep investment market,
supported by institutional
capital, REITs and private
investors.
. Top picks: Seoul andSingapore offices, longterm logistics, and mature
Japanese residential.

South Korea is a relatively mature market for institutions andprivate investors. The depth of the market means it is finding
a way through the recent shortfalls in debt and equity in themarket. Values have started adjusting in the wake of the higher
rate environment. This has opened up very unusual short-term
opportunities in debt markets with high borrowing costs. The
Seoul office market is the most liquid and mature sub-market inSouth Korea, which also carries supportive underlying market
conditions: low supply, strong occupier demand, and limited
new supply. Pricing is correcting and quality assets are slowly
appearing in the market at a discount.
As for Japan, the story for investors continues to be dominatedby monetary policy — but we believe the fundamentals will drive
allocations here. We expect Japanese real estate to maintainrobust yields, but the sector outlook is asymmetric. While its
weaker occupier market could lead the office sector to a pricecorrection in the next few years, logistics and residential are
better positioned. They are backed by stronger occupier demand
and the defensive qualities of residential, which will continue
to attract capital. Logistics and Tokyo multi-family assets,
supplemented by some selective allocations to regional cities,
seem the most compelling investment areas in the next couple ofyears.
While the near-term outlook for Singapore has turned morecautious, we remain bullish on the longer-term fundamentals.
Pro-business initiatives timed to boost Singapore’s position
as a global business and private wealth hub will underpin
further upside. The removal of older city-centre office stock forredevelopment into residential and hospitality space will also bebeneficial. Moreover, we think Singapore offices could be a strong
candidate for investors seeking assets that are more defensive
against higher inflation (occupier fundamentals help to keep
pricing power in the hands of landlords), market volatility andgeopolitical risks.
In Australia, the investment market is mature and transparent,
and the tenant base is international. Urban industrials in New
South Wales and Victoria remain attractive, given the underlying
fundamentals. The national vacancy rate for industrials andlogistics has hit a record low of 0.6%. This chronic undersupply of
space, along with pent-up demand from the ecommerce sector,
has led to significant rental growth over the past few years.

Exploring the motivations of investors in real estate13

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