High Climbers


According to new research and despite concerns about asset valuations and weakening economic growth, the appetite for investment in commercial real estate among global institutions has reached its highest point in seven years.

However, institutions remain underinvested in property, claims a report carried out by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate.

The seventh annual Institutional Real Estate Allocations Monitor found institutions’ view of property as an investment opportunity from a risk-return standpoint, increased from 5.1 to 5.7.

Which reflects the fact that institutions continue to realise investment results well in excess of target returns. Given late-cycle concerns, institutions are utilising leverage prudently and prioritising allocations to cycle-resistant strategies including credit and niche asset sectors.

Douglas Weill, managing partner at Hodes Weill & Associates, states: “Globally, we’re in a yield-starved environment, and real estate has proven to be one of the few asset classes where investors can still find yield without exposure to excessive risk. This is the primary reason why we’re seeing a flight to safety in real estate. However, there remains a significant amount of dry powder on the side-lines as good investments become harder to find – which could explain why institutions remain meaningfully under-invested relative to target allocations.”

The report found that, this increase is contributing to continued growth in target allocations, which increased to 10.5% in 2019, reflecting a 10-basis-point increase year-on-year and a 160-basis-point increase since 2013 – the year in which the survey was first conducted. It also implies the potential for an additional $80bn to $120bn (£62bn to £93bn) of capital to be allocated to property over the coming years.

However, annual increases to target allocations appear to be moderating, as this year’s growth marked the lowest increase since the survey’s inception. The rate of increase has been in the 20- to 40-basis-point range over the past five years.

Target allocations are expected to rise another 10 basis points in 2020, led by institutions in the Americas and Asia Pacific (APAC) regions, which are forecasting increases of 20 basis points each. They are expected to remain consistent in the Europe, Middle East and Africa (EMEA) region.

The survey also found that institutions remain significantly under-invested in real estate relative to target allocations, at 9.4% - around 110 basis points below target. These margins are even larger in the APAC and EMEA regions, which are under-invested by 150 and 170 basis points, respectively.

In all, 50% of institutions are under-invested relative to target allocations by an average of 190 basis points. One APAC-based sovereign wealth fund noted that this is due to the increasing challenge of investing in real estate as return projections decline. Institutions reported an average return of 8.8% in 2018 – a 30-basis-point decrease from the prior year. On a trailing three and five-year basis, institutions have seen average annual returns of 8.9% and 9.9%, respectively – well in excess of target returns of 8.3%.

From a risk-return standpoint, the research found that added value continues to be the most favoured investment strategy, with 91% of institutions reporting that they are allocating capital to these types of investments. Interest in core increased slightly, with 66% of institutions allocating to these strategies, up from 63% in 2018. The only strategy to see a decline in interest across the full range of institutions was opportunistic, which highlights a global shift towards more defensive, income-oriented strategies.

“Real estate is an important and growing allocation in institutional portfolios. Despite concerns about late-cycle risk, real estate fundamentals – including supply and demand trends – remain broadly favourable. This has been driving strong returns, which in turn is contributing to continued liquidity in the asset class,” said Dustin Baker, director of the Baker programme in real estate at Cornell University.

Allocations to third-party managers continued to trend upward in 2019, driving double-digit growth in global AUM for fund managers. Approximately 70% of the institutions surveyed outsource their entire real estate portfolio to third-party managers, and it is expected that 87% of new investment allocations over the next 12 months will be allocated to third-party managers.

The willingness to invest with emerging managers dropped to 13% among all respondents, reflecting a strong preference for established managers at this point in the cycle.

The 212 institutions that participated in this year’s survey represent aggregate assets under management of $12.3trn and portfolio investments in real estate totalling approximately $1.1trn.


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