When you look at real estate investment even 10 years ago, the traditional approach was to buy an asset that you could sit on to generate rent without taking on any operational exposure. That has now changed. In today’s environment, and especially against a backdrop of significantly compressed yields, there is an understanding that investing in asset classes in which you can take greater operational exposure, can allow you to achieve a more balanced risk-return profile. This shifting risk-return spectrum lends itself well to the alternative real estate sector, and specifically to asset classes like residential, hotels and senior housing – because all of these are inherently operational businesses.
This greater operational exposure is important both in periods of growth/expansion (as we’ve seen in the past years) but also in less buoyant market backdrops, where it provides additional levers for value creation and greater control for the asset owner. As we shift gears in the interest rate cycle and contend with a less certain inflation backdrop, these additional levers can prove crucial in protecting the value of real estate portfolios.
On a broader note, at Azora, we invest in accordance with global megatrends – and we believe that alternative assets are well positioned to capitalise from the supply demand imbalances created by some of these megatrends. For example, in Europe, there is a clear need for new quality product in the affordable residential for rent and senior housing segments. Likewise, we also see scarcity of land for new hotel products in prime sun and beach locations, causing a constrained supply which is coupled with a growing demand for this product. So, to the extent that you know how to manage the operational exposure, not only are you more protected because of your ability to lever that operational exposure but you are also well positioned in as much as we are targeting sectors with supportive tailwinds which should hold firm across cycles.
Having said all this, at Azora we continue to invest in non-alternative real estate sectors too, such as offices and logistics - but we always look for assets which will benefit from megatrends, and which will continue to be fit for purpose in the years to come.