NEW YORK CITY—Global institutional investors' average target allocation to real estate has crossed the 10% threshold for the first time since 2013, says Hodes Weill & Associates. That being the case, though, the pace of annual growth has moderated from between 30 and 40 basis points over the preceding four years to 20 bp this year to 10.1%, according to the fifth annual Institutional Real Estate Allocations Monitor.
Conducted by Hodes Weill and Cornell University's Baker Program in Real Estate, the Allocations Monitor shows that many institutions fall short of that 10.1% target. Although 92% of the 244 institutions surveyed are actively investing in real estate, “portfolios remain approximately 100 bps underinvested relative to target allocations,” the report states. Approximately 60% of institutions are under-invested in real estate relative to their target allocations, up from 50% in 2016.
The moderating growth pace extends to closing the gap between target and actual allocations. Although 22% of institutional investors surveyed indicated that they expect to increase their target allocations over the next 12 months, that's down from 30% who said the same thing a year ago.
“While exceeding the 10% threshold is a seminal moment, the steady growth in allocations to real estate that the industry has experienced over the years appears poised to decelerate in the near term,' says Douglass Weill, managing partner with Hodes Weill. “This is due primarily to waning investor confidence, a trend that we've seen grow increasingly stronger since we first began conducting the survey. However, we anticipate that the long-term outlook for institutional capital allocations to real estate will remain positive given the asset class' many benefits.”
The report notes cites a number of factors that have contributed to a significant year-over-year decline in institutional confidence in the asset class. The survey's “Conviction Index,” which measures institutional investors' view of real estate as an investment opportunity from a risk return standpoint, declined from 5.4 to 4.9 over the past 12 months. Institutional investors cited frothy valuations, geopolitical unrest, possible interest rate increases and global capital markets volatility as causes for concern.
Worldwide, institutional real estate portfolios generated an average annual return of 8.6% in '16, down from 11.0% the year prior. However, the report notes that institutions' investment returns exceeded targeted returns by 20 bps and remain well ahead of global return indexes for real estate. The trailing five-year average annual investment return was 10.4%. Institutions in the Asia Pacific region achieved the highest average annual return last year at 9.3%, with the Americas following at 8.7%. The institutions surveyed collectively have more than US$11.5 trillion in assets under management, with real estate accounting for US$1.1 trillion of that total.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
