Investors Plan to Increase CRE Allocations

Institutional investors expect to increase their allocations to commercial real estate, reported the Pension Real Estate Association, Hartford, Conn.

Institutional investors including large banks, insurance companies, real estate investment trusts and pension funds currently target 10.4 percent of their total capital for real estate, up from 10.2 percent a year ago. But PREA’s annual survey of investor intentions said that figure remains 1 percent below investors’ average target CRE allocation. More than 63 percent of institutional investors expect their allocation to real estate to increase over the next two years.

PREA Research Director Greg MacKinnon said the survey results reflect a “conundrum” faced by many investors today. “On a relative basis, real estate remains quite attractive compared to other asset classes and new capital continues to be allocated to commercial property,” he said. “But, given the consensus that real estate returns will lag historical averages going forward, investors face issues with how to invest that new capital. Investors are looking for ways in which to drive returns in a low-return environment.”

MBA Vice President of Commercial Real Estate Research Jamie Woodwell said commercial real estate continues to attract strong attention from institutional investors. “As they grapple with low yields in just about every investment option, real estate investors are weighing the trade-offs between core strategies and value-add,” he said.

Woodwell noted the PREA survey found growing interest in value-add real estate assets, which has been one of the reasons for increased lending volumes by investor-driven lenders such as debt funds and mortgage real estate investment trusts, many of which focus on construction and bridge lending. 

PREA said investors are seeking ways to achieve higher returns in a low-yield world. “Almost half of investors expect value-add to be the best-performing strategy in the U.S. this year,” the report said. While investors based outside North America remain focused on core properties for their U.S. investments, less than 20 percent of North American investors believe core will outperform. “Hence they have a much greater interest in higher-risk strategies [including value-add] within the U.S.,” the report said.

The greater interest in higher-risk investment strategies by North American investors also reflects historical differences among investors from different regions, PREA noted. North American investors presently have nearly half their total portfolio invested in either value-add or opportunistic opportunities compared to about 15 percent for both European and Asia-Pacific-based investors.

Survey respondents said they expect to deploy $101.3 billion of new capital into real estate in 2020. Most of that new investment–61 percent–will come from European investors, with just under 20 percent each coming from investors in North America and the Asia-Pacific region.

“Interest in non-listed private equity real estate funds as a vehicle for U.S. investment is increasing,” PREA said, noting 45 percent of respondents indicated plans to increase their use compared to just 7 percent who said they expect to reduce their use of funds. For U.S. investments, non-listed real estate funds are most popular with North America-based investors. Closed- and open-end funds combined make up nearly half of U.S. real estate assets held by North American investors, compared to just under 29 percent of U.S. real estate investments held in funds by European investors and less than 20 percent for investors from Asia-Pacific.