The research, commissioned by TIME Investments which specialises in real asset income-producing funds, shows that  70 per cent of respondents are targeting between 11 per cent and 20 per cent allocation to property as part of their clients’ portfolios. More than two thirds (67 per cent) of advisers surveyed are using UK direct property (funds that directly own physical assets) and 30 per cent are allocating to listed property such as REITs.

The research shows that investment in property funds is set to rise, with over half of respondents (53 per cent) expecting to increase their clients’ allocation to direct property over the next 12 to 24 months, with 47 per cent keeping allocations the same. Half said they expect to increase their allocation to listed property, such as REITs, over the next 12-24 months, with 49 per cent expecting no change in allocation. In both cases, the research shows that the increased focus on investing in property funds is driven by a desire to de-risk portfolios through diversification, followed by an increased focus on ESG.

Advisers and wealth managers are also keen to explore innovative options to enable their clients to access property investments. For example, the majority (98 per cent) of those interviewed said they would be likely to recommend a ‘hybrid’ property fund to a client, which provides a unique blend of direct property and listed securities such as REITs.

When asked to select the top three reasons for selecting hybrid property funds for their clients, 70 per cent selected their ability to provide attractive risk-adjusted returns and two thirds (67 per cent) selected their ability to lower volatility when compared to a portfolio of listed real estate securities. A further 53 per cent selected the attractive diversification benefits hybrid funds offer across a wide range of property sectors.

Roger Skeldon, Head of Real Estate and Fund Manager at TIME Investments, says: “The outlook for UK property is looking positive. In the physical property sector, yields are stabilising, and rental growth will be the key driver of returns. We are seeing a positive reaction to the recent interest rate cut and there is more diversity in the larger REITs as the UK market has matured, meaning exposure can be more effectively spread across different property sub-sectors.

“Our research shows that advisers and wealth managers are increasingly looking to property investments as a route to diversification and a way to help their clients achieve attractive risk adjusted returns, without the volatility associated with mainstream equity investments.”

The reasons why are clear. The UK faces a stark reality: it has regional disparities and currently ranks among the most unequal developed countries. Poorer households spend a significantly higher proportion of their income on housing than wealthier households, and this gap has grown wider in recent years. Figures from the Institute for Fiscal Studies show that in 1968, the poorest quarter of the population spent 9 per cent of their income on housing; in 2021, it was 21 per cent.

The government has a crucial role to play but it cannot tackle this challenge alone. Private investment is needed across the UK to raise living standards and wellbeing nationwide.

The government has called explicitly on Local Government Pension Scheme (LGPS) funds to invest 5 per cent of their assets in projects supporting the UK. 

While institutional capital can deliver a meaningful impact across the UK, investors should approach the challenge carefully, fulfilling their fiduciary duty obligations, as well as commitments to social and environmental change.

The answer in meeting those objectives may lie in supporting affordable housing sector.

Why affordable housing as part of an ESG strategy

Housing is more than a roof over one’s head; it is the foundation of thriving communities and vibrant economies. 

High-quality housing has a clear and direct link to living standards, and the affordable housing sector presents an opportunity for an outsized ESG impact.

First comes from economic impact. Affordable housing can attract and retain talent by allowing skilled workers and young professionals to move to areas with job opportunities. This fosters economic growth and innovation. When residents spend less on housing, they have more disposable income to support local businesses, further boosting the economy. Further, providing housing security helps improve their job prospects and educational attainment.

Second, stable and secure housing is essential for physical and mental health, improving overall well-being and reducing social issues. Affordable housing helps anchor communities, fostering social cohesion and preventing displacement. It also leads to better educational outcomes for children, breaking the cycle of disadvantage.

Next, affordable housing in less prosperous areas can attract investment and businesses, reducing the dominance of major cities. Investments in affordable housing can revitalise disadvantaged areas, improving infrastructure and public services. Giving people agency through affordable homeownership or secure rentals fosters community participation and development.

Finally affordable housing has a positive environmental impact. By being more energy-efficient, affordable housing can also have a positive environmental impact in reducing the carbon footprint. Sustainable design and construction practices, such as incorporating energy-efficient appliances, solar panels, and recycled building materials, become more accessible with affordable housing. This translates to lower energy bills for residents and a significant reduction in greenhouse gas emissions overall. Energy-efficient features in affordable housing directly address fuel poverty, a significant issue where residents struggle to afford adequate heating.

These impacts can be measured and reported, allowing investors to fulfil their obligations and commitment to investing in UK living standards.

Affordable housing as a driver of attractive returns

The potential of developing and improving the quality of affordable homes to improve living standards in the UK is matched by the potential for an attractive return profile for investors. 

The affordable housing sector is built on targeting potential stable returns. It aims to deliver dependable cash flows and low volatility, regardless of the economic climate.

In fact, public sector funding can bolster rental incomes, ensuring a steady stream of revenue. As an added advantage, inflation-linked rents provide a hedge against economic fluctuations, promising growth alongside stability.

But this is not to say the affordable housing sector is without challenges. It is a sensitive area for private investment, and allocation to, and management of, affordable housing should consider all stakeholders via a sustainable funding model. A model that ensures collaborative and long-term models between housing associations, local authorities and investors.

Building a portfolio of affordable homes that fund managers and institutional investors can be truly proud of, that are energy-efficient homes and affordable from the outset and throughout their life should be the goal.

The firm writes that this is the first such real estate vehicle dedicated solely to a DC audience, the Invesco Global Direct Property Fund (GDPF) aims to improve DC investment outcomes by investing in direct global real estate, offering potentially higher returns and a lower risk profile through portfolio diversification and straightforward access to a mainstream global asset class at low cost.

Importantly, GDPF includes specific and innovative liquidity terms for DC schemes, platforms and master trusts. The launch builds on Invesco’s range of global real estate funds established for different investors worldwide.

“We have long seen demand among DC schemes to invest in global direct real estate but there have been surprisingly few options for them. The launch of GDPF represents, in our view, a new approach for the DC investor and demonstrates Invesco’s commitment to being a leading provider of investment solutions to UK DC schemes and their members,” says Kate Dwyer, Head of UK Distribution, Invesco.

“This fund builds on Invesco’s long-term track record in the institutional market and our belief that DC stakeholders deserve the same opportunities as sophisticated institutional investors but with terms aligned to their needs. GDPF not only supports the DC industry’s focus on increasing allocation to alternative asset classes but also the UK Government’s Value for Money consultation.”

Simon Redman, Managing Director, Head of DC and Wealth at Invesco Real Estate says: “Improving outcomes for DC members through easily accessible investments in private markets is a key focus for many at the current time. Real estate is by far the largest private markets asset class, but it has not been fully optimised in portfolios. Despite recent macroeconomic news and equity and bond market volatility, real estate as an asset class has continued to offer attractive historic performance and low volatility.”

Sachin Bhatia, Head of Pensions and EMEA Consultant Relationships at Invesco, says: “GDPF finally gives DC members access to this asset class via a dedicated DC fund, which we believe will improve member outcomes. The fund leverages our GBP 73.8 billion real estate business where we have 40 years’ experience and, at its core offering, has an implicit sustainability focus with an explicit business-wide net zero target, which we believe enhances potential returns.”

The firm writes that DC pension schemes typically invest in direct UK-only property or global REITs. In contrast, investing in global direct real estate can potentially reduce risk and enhance returns. The UK comprises less than 5 per cent of global investible real estate and, by investing globally, DC investors can benefit from stable income backed by physical buildings but without the risk of being constrained to a single country, the firm says. Investors will also benefit from Invesco Real Estate’s active approach to reducing CO2 emissions, water and waste.

At launch, the fund will invest its assets globally through Invesco Real Estate managed funds that predominantly focus on direct properties in Europe, the US and Asia Pacific developed markets. Investors into GDPF will, therefore, be investing in a direct real estate portfolio of more than USD30 billion, which is one of the largest directly managed portfolios in the market today.

Examples of underlying investments include residential in Japan, logistics facilities in South Korea, healthcare in the US, and luxury retail in Milan.

Simon added: “With over 95 per cent of real estate markets around the world being outside of the UK, they offer different opportunities to those available in the UK and also react differently to market circumstances – there are compelling opportunities to invest in sectors such as Japan cold storage, Australian student housing, and US single family housing which are simply not available in the same way in the UK.

“GDPF will provide diversification through access to international markets and sectors that can be less volatile and potentially offer more rewarding income and growth.”

BlackRock writes that European real estate markets have recently repriced more swiftly than other regions. Amid stabilising interest rates and inflation, EFVI, the latest vintage in BlackRock’s European value-add series, plans to take advantage of this attractive entry point.

The Fund will target the most liquid markets in Europe, with a focus on the UK, France, Germany, the Nordics and Spain; and invest in high-quality assets aligned with the structural “mega forces” driving the economy and future occupier demand. These mega forces include demographic shifts, digital disruption and the transition to a low-carbon economy and a net zero built environment.

The Fund will focus on, amongst others, the need to develop student housing and new residential units, and to provide business-critical logistics and data centre premises in under-supplied markets. As an SFDR Article 8 fund, EFVI aims to create future-proof assets with strong ESG credentials, including high-energy efficiency and pathways to net-zero emissions.

Business plans will focus on recapitalising, repositioning, and rebuilding assets with the BlackRock teams using a hands-on approach to deliver value throughout the life cycle of each investment.

BlackRock’s broad network, extensive research capabilities and on-the-ground presence across European regions creates an ability to source off-market opportunities for its clients – an important source of deal flow across recent vintages. To date, EFVI has already committed EUR289 million of equity across four investments: two logistics assets in Sweden, and multi-family assets and student housing in the UK.

Anne Valentine Andrews, Global Head of Real Estate & Infrastructure at BlackRock says: “The European Value-Add series is a vital component of our USD28 billion global private equity real estate business. Despite continued market uncertainty, the window of opportunity is opening for real estate investors. This requires getting granular within asset classes and harnessing the structural mega forces driving future demand and requirements for real estate. We are pleased to partner with our clients in this latest vintage, delivering local market knowledge and personalized service from BlackRock.”

Thomas Mueller-Borja, Global CIO of Value-Add Real Estate and Co-Portfolio Manager of EFVI, says: “We are delighted to partner with our clients, many of whom have committed to prior EF vintages. Cyclical and structural factors are creating what we believe is the best real estate buying opportunity since 2008. It is crucial to remain disciplined and selective in more volatile times, and we continue to apply the research-led, principle-based investment approach which has consistently guided our decision-making over the years.”

Tatiana Tezel, Co-Portfolio Manager of EFVI, said: “We continue to see attractive opportunities in the European real estate market, particularly as inflation and interest rates stabilise. We have already committed EUR289 million of equity to a range of exciting projects, all of which the team sourced off-market and negotiated attractive entry prices on. We continue to find new opportunities and have developed a diverse pipeline of investments under exclusivity. We’re focusing on fast-growing locations and resilient sectors and developing high quality real estate that meets tenant requirements now and in the future.”

Government and regulators were deemed less influential despite having publicly stated ambitious commitments to meeting net zero targets by 2030 and 2050.

The value of sustainable assets is reinforced by the research findings, with 90 per cent of UK real estate professionals reporting that asset values have increased by 16 per cent–25 per cent as a result of green premia, the firm says.

The impact of poor ESG performance is also marked with half of respondents experiencing asset values which are 16 per cent–20 per cent lower in buildings with poor carbon footprints, and 42 per cent seeing values which are 21–30 per cent lower. Some 54 per cent are experiencing rental yields which are 21–25 per cent lower because of brown discounting, as occupiers increasingly favour greener buildings. 

Commenting on the research findings, Katie Whipp, Head of UK, Deepki, says: “Our research shows that fund managers are at the forefront of the drive to improve commercial real estate’s ESG credentials.  They have seen the capital and rental values of green assets increase by 16–25 per cent because occupiers are prepared to pay a premium for buildings which are energy efficient and provide an environment which supports the health and well-being of employees.

“We expect ESG regulation to tighten up in the UK during 2023 which will make greenwashing much harder and will support the drive for real change across the sector.”

Deepki writes that it offers a fully populated ESG data intelligence platform to help commercial real estate investors, owners and managers improve the ESG performance of their real estate assets, and in the process enhance their value.

The firm says that the SaaS platform enables clients to collect ESG data, get a comprehensive overview of their portfolio’s ESG performance, establish investment plans to reach net zero, and assess results. It also allows users to report to key stakeholders. The platform is supported by carbon and ESG experts who partner with clients across data collection and analysis, through to ESG strategy definition and implementation.