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SEI: CMBS investors remain active despite COVID threats

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As businesses reopen from Covid-19 lockdowns and resume paying rents, investors scouring the best performing tranches in real estate asset classes are finding a sector that appears to be resilient amid an epic test of time.

After recent unrest, on top of the Covid-19 related disruption of businesses, plus market volatility of the last three months, "we are seeing the largest most sophisticated managers continue to invest and expand their investment in the real estate market," said Jay Cipriano, senior vice president and head of alternatives for investment manager services at SEI.

That's one of many insights from SEI's recent survey of 177 fund managers and institutional investors about their appetite for real estate investments in the aftermath of the coronavirus-induced lockdowns.

Conducted in partnership with Preqin, the survey results in the report, “The Future of Real Estate Investing” combined with recent activity, suggest that this market "has survived the test of time," Cipriano said. "We're seeing the largest managers continue to put focus and added investment there. They're jumping in."

It's a bit of a yin and yang analysis of understanding cash flows, added Ross Ellis, vice president and head of thought leadership for SEI Investment Manager Services. You have "existing asset backed securities [that] may have some issues because tenants and borrowers aren't paying," he said. Lower tranches are still in 90-day forbearances on the asset-backed side, yet higher-rated tranches among stronger borrowers and essential services are in better shape. Now, technology exists that enables you to slice and dice the tranches a lot cleaner, Ellis said. "Investors could imagine more opportunities and more issuance than there has been in the past."

This is a big difference from the financial crisis of ten years ago compared to the knock-on effects from the Covid-19 health issues that drove this downturn. Ellis said he sees an "awful lot more interest in real estate now than there has ever been.” Technology is improving at the same time so you add those two together to see renewed interest.

Tech-driven dives into asset classes to analyze the fundamentals may help explain another key finding regarding investments in "environmental, social, and governance" (ESGs). The survey said "33% of North American investors have turned down ESG opportunities compared to 57% of European investors on ESG investing principles." On the other hand, some 56% of fund managers are more likely to turn down "otherwise attractive investments on ESG grounds."

For many real estate experts, ESG-driven investments are still a work in progress because guidelines are evolving. "There hasn't been a uniform set of standards for ESG so it's hard to say if 'this fits and [that] doesn't' fit," Ellis added. So, it evolves to a kind of feel for ESG. "As an investor, it's hard to put these various opportunities side by side and compare them because they're based on different things."

Until investment metrics and performance guidelines evolve, (ESG) factors will continue weighing on investors' minds -- just not their investment decisions. Right now, the priority for real estate classes is quantifying cash flows with laser-focused tranche analysis.

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