Speaking to PropertyEU at Mipim, Jovy, head of real estate product management at Universal Investment, said the changed market circumstances will see institutional investors scrutinize their portfolios.

‘They will be looking at their portfolios again and wondering if they should change their strategy. Demand for real estate is slowing down, ESG is becoming more important which involves investments, so they might reconsider, said Jovy. ‘This is the moment that every owner and portfolio holder of real estate is going to upgrade, modernise and renovate their buildings.’  

Universal Investment, which has €975 bn of fund assets under management, will also be weighing up its options. ‘Universal has three kinds of investments: securities, alternatives and real estate,’ Jovy explained. ‘Real estate is by far the smallest but for years it has been the second most profitable in absolute numbers.’ That, he said, is because it is a managed business where the fee level is high.

Now that interest rates have gone up and the bond market has come roaring back, real estate will have to compete with other asset classes within investors’ portfolios.

Nonetheless, real estate’s resilience in times of high inflation – due in part to most rented property being indexed by contract – will play to its advantage, Jovy suggested. In addition, there is not much new development activity because financing costs are higher, and the high levels of leverage seen a decade ago are a thing of the past.

The tougher climate will also put asset managers to the test. In a rising market they could sit back and enjoy the ride. ‘Now the situation is different,’ Jovy said. ‘The asset manager has to show his qualities. He has to buy smartly, rent at sharp rates, do necessary repairs cheaply and negotiate the best energy contracts.’ In a tough climate, the good managers will stand out, while the rest will have problems.