Investors Plan to Increase Allocations to CRE

Institutional investors expect their allocations to commercial real estate investment will rise slightly in the future, reported the Pension Real Estate Association, Hartford, Conn.

The average institutional investor (large banks, insurance companies, real estate investment trusts and pension funds) currently targets 10.2 percent of total capital for real estate. PREA’s annual Investment Intentions Survey found investors plan to allocate 10.4 percent of their capital to CRE rather than to alternative investments such as bonds or other securities. “Diversification remains the main benefit attracting investors to the asset class,” PREA said.

The gap between investors’ target allocations and their actual allocations to real estate has narrowed “dramatically,” PREA noted. Average allocations to real estate increased from 8.9 percent two years ago to 10.0 percent currently–just shy of the 10.4 percent average investor target.

MBA Vice President of Commercial Real Estate Research Jamie Woodwell said the narrowing gap between investors’ target and actual allocations indicates they have been following through on their goals of increasing stakes in commercial real estate. “[But] allocations are catching up to targets, which could suggest a slowdown ahead in new assets,” he said.

PREA reported investors from Europe expect to increase their U.S. CRE allocations while most Asian-Pacific investors expect no change this year. Nearly 40 percent of North American investors expect their CRE investment allocation to increase compared to 15.4 percent who said they expect their allocation to decrease. “The percentage of North American investors expecting a decrease is larger than for their peers in other regions,” PREA said.

More than 80 percent of investors ranked by assets under management expect to increase their real estate allocations, which indicates that larger investors are more likely to allocate more to CRE going forward than their smaller peers, PREA said.

For investments in U.S. real estate, value-add remains the most attractive investment style, PREA said. More than half of investors surveyed called it the most attractive investment on a risk-adjusted basis. Core investment increased substantially from last year with 41 percent choosing it as the most attractive style compared to 29 percent last year while opportunistic investments became less appealing–only 7 percent of investors ranked it most appealing versus 16 percent last year.

“These results suggest investors may be taking a more risk-averse approach to their real estate investments, possibly because of the widely held view that we are in the late stage of the current cycle,” PREA said.