Increasing allocations to real estate by institutional investors

actively investing in real estate

In the 2018 institutional real estate allocations monitor by Hodes Weill Associates, target allocations to real estate in institutional portfolios continue climbing in 2018.

weighted average target allocation to real estate 2018Rising from 8.9% of a weighted allocation in investors’ portfolio, the 2018 figure is now 10.4%, suggesting an increasing attractiveness of the real estate asset class to investors.

In the survey, 208 institutions from 209 countries representing US$11 trillion of assets are asked about their target and projected allocations.

The survey provides an estimation of the quantum and directional trend of investable capital.

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In the same vein as rising allocations to real estate, 92% of investors are actively investing in real estate, compared with 72% in 2014.actively investing in real estate

Historical and target returns

The average long-term target return for global institutional allocations to real estate remained flat from 2017 to 2018 at 8.2%.

Compared to previous years, endowments & foundations continue to have one of the highest return targets. However, it is notable that their target return decreased 70 bps in 2018, reflecting a more negative outlook on the asset class.Historical and target real estate returnsAfter a steep decline in actual returns from 10.9% in 2015 to 8.7% in 2016, returns accelerated to 9.2% in 2017. Across the past 5 years, the actual returns on real estate investments registered 10.3%.

Investor conviction

Despite rising allocations to real estate investments, the conviction index measured by Hodes Weill Associates show a downtrend, suggesting some mismatch between views of the real estate asset class.

The difference comes as a bit of a surprise, as investors continue to cite concerns regarding rising interest rates, asset valuations, geopolitical risk, in addition to being late in the cycle.real estate conviction indexThe conviction index has been falling over the past 5 years, suggesting that there has been an increasingly pessimistic view of the real estate asset class.

The following are some soundbites from survey respondents.

“Compared to other asset classes, real estate still appears more attractive and we must continue to invest”. – SWF / Govt Agency, The Americas, US$25 to 50b.

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“The economy is late in the cycle. Interest rates are rising. Although the current real estate environment is positive, real estate is highly sensitive to the economic cycle and it does not make sense to put new capital at risk given such high valuations” – Endowment / Foundation, The Americas, US$1 to 5b.

“Unclear geopolitical issues, the projected rise in global interest rates, and high valuations in most big cities make it hard to allocate to gateway cities” – Public Pension, Asia Pacific, US$5 to 10b.

Risk preferences

Value add strategies are the most popular among investors in 2018, with 90% of institutions reporting that strategy as their preference in the year.

Core strategies are the least popular. The preference for this strategy by investors has also declined from 69% in 2017 to 63% in 2018.

Opportunistic strategies are the second most popular, with 75% of survey respondents showing interest in that strategy.

As valuations become stretched, the increasing focus on value add and opportunistic suggests that investors are stretching for yield.

Indeed, as valuations rose over the past 5 years, value add and opportunistic strategies rose greatly in popularity.

real estate risk preferences

About Hodes Weill & Associates

Hodes Weill & Associates is a real estate advisory firm with a focus on the investment and funds management industry. The firm has offices in New York, Denver, Hong Kong and London.

The firm publishes their real estate allocation monitor annually, with the real estate allocation monitor 2018 being the latest.


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