Despite raging inflation, billionaires and institutional investors continue to allocate to real estate
Yesterday the Labor Department released the latest inflation figure, showing its consumer-price index rose 8.3% in August from the same month a year ago. The subsequent market selloff (S&P 500 down 4.3%, Nasdaq down 5.2%) illustrates how concerned markets are about the impact of inflation across the globe. In response, central banks are hiking rates at a record pace, including 75 bps increases from the European Central Bank and the Bank of Canada in the past week. However, despite the economic uncertainty, billionaires and institutions have continued to increase their allocations to real estate, especially hospitality real estate, throughout the year. Below, we'll get into why that's the case.
Amancio Ortega, the founder of Zara, and his family office, Pontegadea, have deployed almost $2bn into real estate over the past year. Not to be outdone, Bill Gates and his family office increased his interest in the Four Seasons Hotels and Resorts by acquiring an additional 24% for $2.21bn, bringing the firm's total stake in the luxury hotel chain to 71.25% earlier this year.
Institutions are also following suit, as evidenced by Blackstone's record $30.3bn raise and non-exchange traded REITs raising billions every month. Specific to the hospitality space, we've seen high-profile deals like the $900mn investment in the Aman Group led by Saudi Arabia's Public Investment Fund and Brookfield Asset Management's €350mn stake in European luxury hotelier Experimental Group.So why are these groups so bullish on real estate?
- (1) it tends to be less volatile than publicaly traded investments,
- (2) it holds intrinsic value and is a scarce resource (there is a finite amount of it in top markets), and
- (3) it tends to hold up well in inflationary environments
At a high level, there are a couple of primary reasons one would diversify their portfolio with real estate:
That third point is topical as we enter a new inflationary regime; the ability to reset prices to market on a regular lease interval ensures that the operator is never far off the market and can keep up with inflation. This is especially true for hospitality assets where nightly rentals are essentially ultra-short duration leases, providing maximum pricing flexibility. Beyond that, investments in high-end properties should hold even better, as they target a consumer base that is generally less price sensitive and have the balance sheets to weather economic downturns.
As billionaires and institutional players look to the mature hotel sector for this exposure, we are taking advantage of these same characteristics in the nascent short-term rental (STR) space. Beyond that, since we are early to this asset class, we benefit from inefficiencies today - fragmented marketplace, small-scale operators, comp-based valuations - to generate outsized returns for our investors.
As the short-term rental (STR) asset class continues to develop, our goal is to build an institutional-grade portfolio of sufficient size to attract the institutional players already allocating hundreds of millions into mature asset classes. We believe that within a decade, institutions will begin allocating to STRs (even if it's an opportunistic allocation within hospitality real estate), much like they are purchasing build-to-rent single-family homes and self-storage portfolios today.
This is another reason we are bullish on the sector and are raising capital to position ourselves as opportunistic acquirers as the real estate market reprices.