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Institutional Investors Plan to Up Their Allocations to Real Estate in 2019

A new report found global institutional investors will target real estate allocations of 10.6 percent on average in 2019.

Institutional investors plan to dedicate more of their funds to real estate next year, continuing a trend that has been seen since 2013, according to a new research report.

Global institutional investors’ average weighted target allocation to real estate is expected to tick up in 2019 to 10.6 percent from 10.4 percent in 2018, according to results of a survey administered by Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, a real estate advisory firm. Last year, this figure was 10.1 percent. The survey included responses from 208 institutional investors, representing 29 countries and about $11 trillion in total assets.

“Real estate continues to gain favor,” says Doug Weill, managing partner of Hodes Weill.

The report’s findings come as more institutions pour more money into the asset class. Preqin, a London-based research firm, earlier this year found that the number of global institutional investors that allocate a least $1 billion to real estate grew by 13 percent from 2017 to 2018 to 499.

Real estate is viewed as a portfolio diversifier among institutional investors, is yielding and is a good inflation hedge, Weill says. Rents tend to trend up in an inflationary environment, he adds.

And even though interest rates are rising, yields on the 10-year Treasury are still low relative to the long-term average. “We’re still in a very low interest-rate environment and investors are still hungry for yield,” says Jim Costello, senior vice president at real estate data firm Real Capital Analytics.

Real estate is also seeing strong returns for institutional investors, Weill says. In 2017, the average total return for these real estate portfolios was 9.2 percent, up from 8.7 percent in 2016. The target for 2018 is 8.2 percent, the Cornell/Hodes Weill report found. “Real estate is outperforming expectations,” Weill says.

However, the increase in allocations will likely be limited to institutions outside the Americas.

The report found that investors based in the Americas on average expect target real estate allocations in 2019 to be at 9.9 percent—flat with this year’s target. Weill says this is something he expects will continue: “If you look at conviction, the institutions in the U.S. have the least favorable view of real estate, and I think it’s driven by a general view that real estate is late in the cycle,” Weill says.

Institutions based in Europe, the Middle East and Africa (EMEA) are aiming for the highest average target allocation next year—11.5 percent, up from 11.1 percent in 2018.

But institutions based in the Americas were closest in 2018 to their targets; their actual allocation of 9.0 percent to real estate was 90 basis points shy of their target.

Institutions from the Asia and Pacific region (APAC) saw the biggest gap between target and actual allocations, of 120 basis points, the report found. This implies that “Asia-based institutions have more capital for investment and are likely to remain active over the next several years,” Weill says.

When it comes to appetite for risk, the report found that North American institutions have the strongest preference for value-add properties. In the Americas, 95 percent of institutions indicated they are actively targeting value-add investments compared to 50 percent that target core strategies. “This is likely based on concerns about valuations peaking, driven in part by an influx of foreign capital in recent years into major North American real estate markets,” the report stated.

Meanwhile, EMEA and APAC institutions continue to prefer core strategies.

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