LAGRANGE Fund Monitor H1 2024: Interest in Secondary-Market Transactions – “New” Asset Classes Keep Gaining in Significance – Serious Interest in Infrastructure Investments

LAGRANGE Fund Monitor H1 2024: Interest in Secondary-Market Transactions Involving Real Estate Special AIF Investors is Approaching Same Level among Institutional Sellers and Buyers – “New” Asset Classes Keep Gaining in Significance – Serious Interest in Infrastructure Investments

• Signs of stabilising inclination among institutional investors to expand the real estate AIF shares in their portfolios
• Residential real estate still the most coveted asset class – albeit with a narrow lead
• Office real estate losing in significance while “newer” asset classes such as micro-living, data centres, light industrial and real estate debt are rapidly gaining
• Risk acceptance: core-plus investments currently more in demand than core investments
• Most popular foreign markets are Benelux, USA, the UK and France
• Infrastructure investments focus on renewable energies, diversified funds as well as digital infrastructure and debt funds

Frankfurt, 26 June 2024 – Having weakened last year, the inclination of institutional investors to expand the share of real estate special AIF exposure in their portfolios has stabilised and slightly increased since the second half of 2023. While “classic” asset classes are losing in significance, the interest in “newer” asset classes such as micro-living, data centres, light industrial and real estate debt keeps growing. In this context, secondary-market transactions are increasingly seen as a viable alternative to the primary market, while infrastructure investments move more and more into focus.

This is suggested by the findings of the eighth survey for the LAGRANGE Fund Monitor that LAGRANGE Financial Advisory GmbH and INVESTMENTexpo conducted during the first half-year of 2024. Companies participating in the survey hail mainly from the insurance, banking, pension fund and pension schemes sectors. A look at the proportion of real estate special AIF out of the special AIF investment total shows a modestly positive index score of 6.25 points (H2 2023: 6.21 points). In this context, a score of 1 would signal a drastic reduction while a score of 11 would imply a drastic increase in the real estate proportion among institutional fund investments. Once again, respondents were asked to rate their interest in infrastructure investments within the segment of special AIF investments, using the same scale. They returned an index score of 7,10 points, which implies a demonstrable inclination to step up their infrastructure investments via AIF vehicles.

As far as risk acceptance in conjunction with investments in real estate special AIF goes, core-plus type investments are clearly in the lead now, as they were picked by 39% of the respondents. Core investments came in second with 33% of the responses, whereas value-add investment received only 22% of the responses, and opportunistic investments remained eligible for few investors at a mere 5%.

As far as preferences for one real estate sector over another go, residential real estate remained the most popular choice, yet it was chosen by just 13% of the respondents (H2 2023: 16%) so that the lead over logistics real estate (12%), the second-most popular choice, narrowed to a single percentage point. Next in line with 11% of the responses each were food-anchored retail real estate and light industrial. Equally remarkable is the interest shown in micro-living (8%), data centres (7%), as well as real estate debt and social and senior housing with 6% of the responses each. At the same time, institutional players quickly lost interest in office real estate, which had topped the list with 19% of the responses as recently as H2 2022 before steadily losing ground. At the last count, office real estate accounted for a mere 6%, the lowest score on record for this sector.

In regard to target regions eligible for investments by real estate special AIF, Germany continues to top the list, but it does so with just 13% of the responses (H2 2023: 19%). Among the markets outside Germany, the BeNeLux region was once again most coveted at 13%. There was also manifest interest in the UK, France and the United States, each boasting 10% of the responses. Generally speaking, interest in other markets has slightly increased, albeit on a relatively modest level in most cases. Among the remaining markets, Switzerland became the most sought-after destination for real estate special funds with a 6% score.

When it comes to infrastructure special AIF, institutional interest focuses primarily on renewable energies (solar, wind power, other renewable energies and energy grids) as well as on widely diversified investment funds; on top of that, there is significant interest in digital infrastructure investments (e. g. fibre-optics, data centres). Here, European countries other than Germany (28%) and Germany herself (33%) are by far the most popular target markets, well ahead of North America (19%) and Asia (6%).

Portfolio diversification is the main reason to invest in real estate special AIF or infrastructure special AIF that was quoted by respondents, followed by the wish to seize specific opportunities in the real estate and infrastructure markets. Conversely, reasons such as inflation protection, drawing on the fund providers’ management expertise and the lack of investment alternatives played a minor role only.

That said, the biggest challenges that special AIF investments in these two segments face present a more differentiated picture. As far as real estate goes, respondents named primarily the risk of falling prices and rents as well as the risk of inflated property prices or low cap rates, whereas the reasons like a short supply of available property or the financing of property acquisitions were less important. The scarcity of investment opportunities was considered the biggest challenge facing infrastructure special AIF, followed by high acquisition prices and low-level cash distributions along with the complexity of the investment products. Other challenges played but a negligible role.

Asked about their inclination to buy units in real estate special AIF on the secondary market, respondents returned an average of 7,06 points, which still represents a clearly positive score although its was slightly lower than the previous half-year (H2 2023: 7.21 points), and it exceeded the index score for the inclination to buy on the primary market for the second time in a row. When asked about their inclination to sell fund units via the secondary market, respondents returned the highest score yet at 7.19 points. Here, a score of 1 would indicate an absolute lack of interest whereas a score of 11 would signal a very keen interest.

Other highly eligible buying choices include units in funds that invest in residential and logistics (24% each), followed by funds investing in infrastructure (20%) and food-anchored retail (19%). Units most likely to be sold by the respondents include those in office real estate funds (38%) and residential real estate funds (22%), whereas investment funds focused on food-anchored retail and logistics are least conceivable with 15% of the responses each.

“We have noted a clear trend toward further differentiation especially in regard to real estate sectors but also with respect to target markets. By contrast, influencing factors like the levels of interest and inflation barely impact the allocation choices of institutional investors,” said Dr Sven Helmer, Managing Director of Lagrange.

Monika Bednarz, Managing Director at Lagrange, commented: “Infrastructure investments are rapidly evolving into an established asset class of the same standing that real estate has already attained. Moreover, the latest survey appears to show that, for special AIF investors, secondary-market transactions are increasingly becoming an alternative to traditional primary market subscriptions.”

Company Contact:
Lagrange Financial Advisory GmbH
Monika Bednarz
Managing Director
Phone:  +49 69 50 50 60 4932
E-mail: monika.bednarz@lagrange-fin.com

Press Contact:
RUECKERCONSULT GmbH
Peter Dietze-Felberg
Phone:  +49 30 2844 987 62
E-mail: dietze@rueckerconsult.de

About Lagrange Financial Advisory GmbH

Lagrange Financial Advisory GmbH (Chartered Surveyors) is an independent multi-asset consulting company that advises institutional investors in regard to new and existing alternative investments, concentrating on real estate, infrastructure, private equity and private debt as well as on secondary-market transactions. The company’s team is made up of experts in the areas of investment funds, real estate, infrastructure and debt, and covers the global markets in the investment fund sector as well as the secondary market. Its investors hail mainly from Germany or other German-speaking countries (the DACH region). Lagrange has placed 40 different funds in a combined volume of c. 3 billion euros in more than 110 transactions over the past 8 years with institutional investors.