2019 CRE Outlook: Decoding FSI investor preferences

Key drivers of increased commercial real estate investment

The key drivers of increased CRE investment vary across FSI respondents. While banks, private equity funds, and hedge funds are looking for higher yields in a relatively low interest-rate environment, insurers are looking for increased portfolio and risk diversification. Interestingly, investors specializing in industrial and mixed-use properties are most positive on superior returns, so FSI respondents looking for higher yields could target those property types.

As FSI investors plan to raise CRE investments, it is interesting to note their focus areas. In terms of markets, the US, Hong Kong, and China are the most sought-after locations. However, hedge funds have a relatively lower allocation to the US and seem to be more focused on value-added opportunities in Asia-Pacific countries.

In terms of investment themes, we found that most FSI respondents are looking beyond traditional models and property features. For instance, hedge funds and insurance players appear likely to increase allocations to properties with flexible leases and mixed-use features, while banks and private equity funds prefer new models such as properties with flexible spaces. For instance, banking and finance organizations across different parts of the world are increasing their focus on flexible spaces to attract next-gen talent.³

What does this all mean for CRE companies? With most FSI respondents upbeat about their future CRE investments, it is a good opportunity for CRE owners to expand their portfolio and FSI investor base. For instance, CRE owners with properties in primary markets can look to diversify their investor group and bring in institutional investors looking for portfolio diversification by enhancing their exposure to alternatives. On the other hand, landlords that have a good proportion of properties outside primary markets and can showcase relatively stable and above-average returns could be attractive to hedge funds, private equity funds, and banks looking for higher yields.

Further, CRE owners can look to be bolder and more innovative in their strategy as FSI investors increasingly value new trends and business models. Owners can be dynamic and unconventional across a range of aspects, including leasing strategies and property features. For instance, they can introduce more short-terms leases to accommodate newer tenants, fill-up vacant spaces, and earn better rentals. They can also perform a variety of enhancements to their properties. Some owners could design spaces for varied uses at different times and increase the use of smarter technologies to augment the user experience.