Investors Focus on Quality As End of Cycle Nears

Investors Focus on Quality As End of Cycle Nears

Investors are starting to focus on quality investments as we grow longer in the cycle. Fundamentals remain strong and the economy continues to grow, but investors are recognizing that the end of the cycle could be nearing and, as a result, are adopting more stable investment strategies. This flight to quality means fewer opportunistic transactions and more competition for premium assets in core locations and in growth areas.

“As interest rates increase, there is a flight to quality. We are seeing the same thing happen in the stock market where we are seeing some quality stocks are becoming more favored over the riskier stocks,” Tim Lee, VP of corporate development and legal affairs at Olive Hill Group, tells GlobeSt.com. “We are seeing the same thing in real estate, and that is because we are getting to the end of the cycle. We don’t know when it is going to end, but no one wants to be caught holding an opportunistic asset when the music stops playing. As a result, we are seeing more of a focus on core locations, growth areas, premium assets and on owning assets that are best-in-class for the area. That is a way that people are hedging against the potential downturn.”

Institutional investors, in particular, are driving this trend. Real estate investment is a requirement in many investment portfolios, and at this stage in the cycle, transitioning to more stable assets is a more prudent strategy. “A number of investors have mandates that they have to own commercial real estate as a way to balance out their portfolio,” explains Lee. “This is a defensive play. People are shying away from some of the tertiary markets and riskier assets that have been popular in the last few years. Looking at capital flows into REIT funds, we are not seeing any increase or a large shift from the real estate REITS. It is harder to tell whether that is happening in the private equity market.”

There has been increasing volatility in the stock market, and while there have been a flight to quality in stocks as well, real estate remains an attractive investment asset class. “From a holistic view, we certainly believe that real estate offers a better hedge against the stock market volatility,” says Lee. “Real estate is a longer-term hold and it is less susceptible to the gyrations of the market, and it is similar to a bond, because it is shooting off cash flow and is more predictable than an equity stock. Investors like the predictability, and we think that real estate is a better alternative to dividend equities and ways to get yield from the stock market.”

Olive Hill Group isn’t making any major changes to its strategy through 2019, even as the Fed continues to raise rates. In general, the firm’s strategy has been focused on core and core-plus product as well as value-add investment. However, it has seen a shift in the market in general. “We are starting to see a bit of cooling off in commercial real estate prices and the enthusiasm from foreign investors,” he says. “We are still seeing new records being set and we are still seeing a lot of transactions and sales volume, but it just isn’t the frenzy that it was in the past. We have always been focused on quality assets and growth areas, and we think that will give us room to weather any storms.”

URL: https://www.globest.com/2018/10/29/investors-focus-on-quality-as-end-of-cycle-nears/