Regional Context and Real Estate Investment Opportunities
Published on 9 August 2023
The increase in interest rates, high inflation, ongoing disruptions to supply chains due to COVID, and later the Russian invasion of Ukraine, led to a shift in investor strategy towards a policy of greater risk aversion, minimal volatility, and a search for higher liquidity. This context, along with structural changes in demand for certain types of properties (lower demand for offices and commercial spaces, and higher demand for industrial and logistics properties), has impacted the expected profitability for investors.
As a result, some institutional investors are adjusting the geographical focus of their asset allocation strategy in response to the higher macroeconomic, geopolitical, and currency risks presented by emerging markets.
There are opportunities in real estate markets that align with investor preferences; there are ongoing demographic changes in Latin America that encourage the rental of housing, the use of industrial, logistics, commercial, entertainment, and workspace properties. Similarly, investors place great importance on the asset class, as it provides high stability of expected cash flows, in addition to its impact on the global sustainability agenda.
At SURA Investments, we have a Real Estate investment platform that not only manages spaces that provide profitability to our tenants and investors, but also has a significant focus on the development of sustainable projects in the region. Our starting point for realizing this purpose is to understand the impact of real estate assets throughout their lifecycle and identify multiple opportunities to contribute to solving environmental challenges, such as climate change and resource-intensive usage, as well as generating prosperity in the territories where they are located.
The second half of 2023 will continue to be challenging for legacy portfolio management but very attractive for investors with liquidity to commit capital to medium-term investments. Investors are attaching great importance to the industrial asset class, given its impact on the regionalization of supply chains or nearshoring (i.e., supply chains close to major consumption centers to: (i) reduce emissions due to shorter times and distances for transporting raw materials, intermediate goods, and finished goods; (ii) lower production costs amid increased labor and logistics costs in China; and (iii) resilience and redundancies in supplies to address unexpected events).
At SURA Investments, the latter is particularly relevant for our real estate funds in Mexico, where we exclusively invest in the industrial segment to take advantage of the structural shift in production processes from China and Southeast Asia to North America. Furthermore, we are now in the process of making investment in these funds viable for our high-net-worth and institutional clients in Chile and Colombia.
Return drivers in 2023 will continue to be well-supported by the set of investment opportunities in industrial assets, given the benefits of Real Estate, such as an inflation hedge that provides portfolio diversification through a variety of asset segments, has low correlation with other asset classes, and provides stable and predictable cash flows. Thus, the challenge will be how to finance transactions at the current level of interest rates.