NEW YORK--(BUSINESS WIRE)--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, according to Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate’s seventh annual Institutional Real Estate Allocations Monitor. This marks the second straight year that confidence in the asset class has increased after five years of steady decline.
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The 2019 survey’s “Conviction Index,” which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.1 to 5.7. This rise is reflective of the fact that institutions continue to realize investment results well in excess of target returns. Given late-cycle concerns, institutions are utilizing leverage prudently and prioritizing allocations to cycle-resistant strategies including credit and niche asset sectors.
Douglas Weill, Managing Partner at Hodes Weill & Associates, said, “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 sidelines as good investments become harder to find – which could explain why institutions remain meaningfully under-invested relative to target allocations.”
The uptick in conviction is contributing to continued growth in target allocations, which increased to 10.5 percent in 2019. This reflects a 10-basis-point increase year-over-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 US$80 to US$120 billion of capital to be allocated to real estate 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 were up for each type of institution, with the exception of endowments and foundations, which reported a 10-basis-point decrease. This is a continuation of a trend the survey noted last year, as endowments and foundations have been reporting continued reluctance to allocate capital to real estate at this point in the cycle. As one such Americas-based institution noted, caution is warranted due to assets being fully priced.
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.
However, the survey also found that institutions remain significantly under-invested in real estate relative to target allocations, at 9.4 percent – approximately 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 percent 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. On the topic of returns, institutions reported an average return of 8.8 percent 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 percent and 9.9 percent, respectively – well in excess of target returns of 8.3 percent.
From a risk-return standpoint, value-add continues to be the most favored investment strategy, with 91 percent of institutions reporting that they are allocating capital to these types of investments. Interest in core increased slightly, with 66 percent of institutions allocating to these strategies, up from 63 percent 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.
Dustin Baker, Director of the Baker Program in Real Estate at Cornell University, commented, “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 favorable. This has been driving strong returns, which in turn is contributing to continued liquidity in the asset class.”
Allocations to third-party managers continued to trend upward in 2019, driving double-digit growth in global AUM for fund managers. Approximately 70 percent of the institutions surveyed outsource their entire real estate portfolio to third-party managers, and it is expected that 87 percent 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 percent 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 AUM of US$12.3 trillion and portfolio investments in real estate totaling approximately US$1.1 trillion.
About Hodes Weill & Associates:
Hodes Weill & Associates is a leading, global advisory firm focused on the real estate investment and funds management industry.* The firm has offices in New York, Denver, Hong Kong and London. Founded in 2009, Hodes Weill provides institutional capital raising for funds, transactions, co-investments and separate accounts; M&A, strategic and restructuring advisory services; and fairness and valuation analysis. Clients include investment and fund managers, institutional investors, lenders, property owners and other participants in the institutional real estate market. For more information, please contact firstname.lastname@example.org or visit www.hodesweill.com
*All U.S. regulated capital market and securities advisory services are provided by Hodes Weill Securities, LLC, a registered broker-dealer with the SEC, and a member of FINRA and SIPC, and internationally, by non-U.S. Hodes Weill affiliates.
About Cornell’s Baker Program in Real Estate
Cornell’s Baker Program in Real Estate is home to the Masters of Professional Studies in Real Estate degree, a comprehensive, graduate-level curriculum that educates the next generation of real estate industry leaders. Cornell is also home to the Cornell Real Estate Council, an extensive network of over 2,000 real estate industry leaders, and host of the annual Cornell Real Estate Conference. For more information, please visit https://baker.realestate.cornell.edu/
For informational purposes only. This is not a solicitation to buy or sell any securities or securities products. Please refer to the full report for important disclaimers. The full report can be found at www.hodesweill.com/research