Institutional Real Estate Allocations Climb Again

Global appetite for commercial real estate remains strong, reported Hodes Weill & Assocs. and Cornell University.

“Institutional real estate portfolios delivered solid investment returns in 2017,” said Hodes Weill & Assocs. Managing Partner Douglas Weill. “Returns continue to outperform expectations, which is likely contributing to the increase we are seeing in investor conviction. This has in turn led to an acceleration in transaction volumes and capital deployment across regions.”

The Real Estate Allocations Monitor report said global institutional investors’ average target allocation to real estate exceeded the 10 percent threshold for the first time last year. Since then their average allocation to real estate increased 30 basis points to reach 10.4 percent. “Moreover, institutions are forecasting a further increase of 20 basis points over the next 12 months,” the report said.

Weill noted real estate as an asset class continues to grow as more institutions seek to diversify their portfolios through greater exposure to alternative investments. “Interestingly, while the U.S. is still the preferred destination for investment, institutions are increasingly favoring investments in Europe and Asia as attractive opportunities in the U.S. become harder to find,” he said. “We expect allocations to real estate will continue to rise steadily given the growing number of institutions that are expressing confidence in the asset class’s many benefits.”

Cornell University Baker Real Estate Program Director Dustin Baker said the 30-basis-point increase in target allocations aligns with a slight increase in the survey’s Conviction Index, which measures institutional investors’ views of real estate as an investment opportunity from a risk-return standpoint. The report’s Conviction Index increased from 4.9 to 5.1, the first year-over-year increase since the survey launched in 2013.

Among the institutions surveyed, insurance companies and public pensions increased their target allocations by 50 and 30 basis points, respectively. “This is largely due to insurance companies seeking greater exposure to yield-producing real estate to match liabilities,” the report said. “The growth in public pensions was primarily driven by European pension plans, which increased target allocations by 70 basis points year-over-year.”

With a 130-basis-point decrease, endowments and foundations had the most significant year-over-year reduction in target allocation, the report said.