CRE: the growing divergence in risk appetite between sponsors and investors

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CRE: the growing divergence in risk appetite between sponsors and investors

New research made by BrickVest reveals a growing divergence in risk appetite between property sponsors and investors with the former looking to originate deals higher up the risk curve for higher returns and the latter opting for low to moderate risk investments with a focus on liquidity.

BrickVest's Sponsor and Investor Risk Appetite Index, part of its 'Commercial Real Estate Trends Report 2018' draws on research conducted among 5,000 property investors and 600 deal sponsors with a combined AUM of €446bn.

It shows that in the 12 months to March 2018 investor risk appetite has fallen sharply from 51% to 45%1 compared to a rise from 50% to 53% for sponsors, resulting in the largest-ever recorded divergence of 8%.

Sponsors seeking riskier deals with higher returns

According to the study, sponsors have been driven higher up the risk curve for returns by the increased competition for core and core plus assets with several traditional markets approaching full capacity.

UK sponsors demonstrated the strongest appetite for risk targeting more opportunistic and development investment strategies than their counterparts in Europe and the US, which are focusing more on value-added transactions.

The Index shows that that value-add real estate opportunities have registered the highest year-on-year increase in sponsor capital deployment, particularly among larger sponsors with over £1 billion in AUM. Over Q1 2018, 33% of capital deployed by larger sponsors was in value-added real estate strategies while core opportunities attracted just 11% of capital, the lowest of any category.

Investors targeting lower risk strategies with a major focus on liquidity

Since Q1 2017 investors have significantly reduced their appetite for high-risk opportunities and are targeting low to moderate risk investments. This trend is particularly strong among investors in the UK, the US and France while German investors remain more focused on opportunistic and development strategies. According to the Index, liquidity has become a significantly more important investment objective, with UK and German investors registering a 55% and 89% increase since Q1 2017.

Emmanuel Lumineau, CEO at BrickVest, commented:"Until now risk appetite among real estate investors and sponsors has largely followed a similar path and our data suggests that the divergence in sentiment has persisted during Q2 and even Q3 2018. As a result, many sponsors and investors are likely to face a much tougher challenge to identify partners that mirror their own risk appetite.

"The BrickVest platform plays a key role in this regard as we directly connect investors with a broad range of institutional-class real estate investment opportunities in a secure, easy and transparent way."

The full report is available at: http://brickvest.com/landing/research

1

# Risk is calculated on a scale from 0 (low risk - income) to 100 (high risk – capital).

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