Lockdowns and other social distancing rules related to Covid-19 are prompting a reassessment of real estate allocations in the European fund industry. In the commercial sector, the pandemic has largely proved that working from home is a practical option, and employers are now rethinking their long-term plans for staff returning to the office.

European investors increasingly favour exposure to industrial and logistical properties, two areas relatively unscathed by lockdowns, according to a recent survey by research and consulting firm Cerulli Associates. They are also showing increasing interest in niche sectors such as healthcare properties, which benefited from the global spotlight on the development of vaccines.

“Managers need to get up to speed on the evolving needs of tenants in order to build compelling products for their clients,” says Cerulli associate director Fabrizio Zumbo.

The real estate sector has also been supported by several tailwinds. For example, the low-interest-rate environment has led European investors to seek alternative sources of stable, yet sufficient, cash flows.

“There has been a greater allocation to alternative investments, including real estate, driven by a desire for enhanced, yet diversified, returns,” notes Zumbo. “One-fifth of the private banks in Europe that Cerulli surveyed expect to increase their allocations to real estate in the next 12 to 24 months.”

Institutional investors are also continuing to diversify their property holdings, with Asia-Pacific exposure set to be of particular interest. For example, foreign real estate now represents 13% of Swiss occupational pension funds’ real estate investments, according to the Swiss Federal Statistical Office, up from 7% in 2010.

Although retail investors remain cautious of open-end real estate funds in the context of the current economic cycle, sustainability is set to dominate conversations in the real estate sector over the coming months.

According to the European Commission, physical buildings consume approximately 40% of energy and contribute 36% of carbon emissions across the EU. Asset managers across the region have already stated their intention to respond to clients’ growing interest in sustainability, Cerulli says.