PREA: Global Allocations to Real Estate Likely to Rise in 2017

Global institutional investors expect their commercial real estate investment allocations to rise, reported the Pension Real Estate Association, Hartford, Conn. 

Institutional investors currently allocate 10 percent of their funds to real estate on average; PREA said investors plan to increase their real estate allocations to 11.5 percent on average, “leaving considerable room for capital to flow into the asset class going forward.”

More than half the investors surveyed plan to increase their global real estate allocations over the next two years, PREA noted. “The greatest uplift in allocations was expected by European investors,” PREA said, noting that European investors plan to increase their CRE investment from 9.4 percent currently to an 11.5 percent target. 

Asia-Pacific investors are not far behind, PREA said. They intend to increase their real estate allocations from 8.4 percent to 10.4 percent. North American investors aim to grow their real estate allocation by 80 basis points from 11.3 percent to 12.1 percent.

But there are significant discrepancies between large and small investors, PREA noted. “While investors of all sizes plan to increase their allocations to real estate, larger investors maintain a lower allocation on average to this asset class as a proportion of total assets under management than their smaller peers,” the report said.

Looking at capital intended for real estate in 2017, nearly half–49.9 percent–will come from European investors, with 36.3 percent from North American investors and 13.8 percent from Asia-Pacific investors, PREA said. The U.S. will likely attract the largest percentage of total capital earmarked for investment at 40.9 percent; while 36.4 percent will likely head to Europe and 18 percent to the Asia-Pacific region. The Americas other than the United States will attract a small but growing 4.8 percent share of the total capital.

“This picture suggests that, in general, investors will be adopting a more diversified global investment strategy than previously,” PREA said.

Last year New York was the most popular intended market for investment. This year, three cities earned that distinction, New York, Los Angeles (up from fifth place) and San Francisco (up from third place). Non-U.S.-based investors remain most concentrated on large primary markets, PREA said. But U.S.-based investors are more diversified, with considerable interest outside the largest markets.

Multifamily remains the most popular sector for new investment this year, followed by the office and industrial sectors, PREA said.