- While allocations continue to increase, the
average investment performance of real estate portfolios is
decelerating -
- Asia Pacific-based institutions achieved
highest average annual return in 2016 at 9.3%, followed by the
Americas at 8.7% -
The real estate asset class continues to experience growth in
institutional capital allocations. In fact, 2017 represents an
important milestone in this regard according to Hodes Weill &
Associates and Cornell University’s fifth annual Institutional Real
Estate Allocations Monitor. This year’s survey revealed that for
the first time, global institutional investors’ average target
allocation to real estate surpassed the 10% threshold.
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The Allocations Monitor shows that the average target real
estate allocation increased to 10.1% in 2017, up from 9.9% in 2016
and 8.9% in 2013—the year in which the survey was first conducted.
Over the past five years, institutional portfolios have increased
their exposure to real estate from 8.5% to 9.1% invested. This
implies that real estate portfolios have increased by approximately
$0.5 trillion in total value, through a combination of capital
appreciation and new investments.
Douglas Weill, Managing Partner at Hodes Weill &
Associates, said, “Real estate has proven over time to be an
important portfolio diversifier, producer of stable income and
hedge against inflation, which is why it’s no surprise that this
strategic asset class now exceeds a target allocation of 10% in
global institutional portfolios.”
Although real estate has enjoyed a steady uptick in target
allocations, the report reveals the pace of target allocations is
moderating. Approximately 22% of institutional investors surveyed
indicated that they expect to increase their target allocations
over the next 12 months, down from 30% in 2016. What’s more, the
pace of increase in target allocations slowed to 20 basis points in
2017 compared to an average of 30 to 40 basis points per year since
2013.
“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. 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,” continued
Weill.
The report notes that a bevy of factors 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.
Reflecting institutional investors’ decline in confidence, the
report reveals that portfolios remain approximately 100 basis
points under-invested relative to target allocations. While
higher-returning valued-add strategies remain the strong preference
for institutions, 60% of those surveyed signaled an increased
appetite for defensive debt and private credit strategies.
As it relates to investment vehicles, closed-end funds are the
most preferred by institutions followed by open-end funds.
Moreover, 31% of institutional investors reported that
environmental, social and governance (ESG) factors are influencing
their investment decisions.
Worldwide, institutional real estate portfolios generated an
average annual return of 8.6% in 2016, down from 11.0% in 2015.
However, investment returns exceeded targeted returns by 20 basis
points 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 in 2016 at 9.3%, followed by the Americas at
8.7%.
Dustin Jones, Director of the Baker Program in Real Estate at
Cornell University, commented: “The Allocations Monitor
provides an unparalleled look into how, where and why institutions
are allocating capital to real estate. It has proven to be a
valuable tool for institutional investors in the development of
portfolio allocation strategies and peer benchmarking of returns,
and for investment managers in business planning and product
development.”
The Institutional Real Estate Allocations Monitor includes
research collected from 244 institutional investors in 28
countries, with total assets under management exceeding US$11.5
trillion and portfolio investments in real estate totaling
approximately US$1.1 trillion.
About Hodes Weill & Associates
Hodes Weill & Associates ("Hodes Weill") is a real estate
advisory boutique with a focus on the investment and funds
management industry.* The firm has offices in New York, Hong Kong
and London. Founded in 2009, Hodes Weill provides institutional
capital raising for funds, transactions, co-investments and
separate accounts; M&A, strategic and restructuring advisory
services; and fairness and valuation analyses. For more
information, please contact info@hodesweill.com or visit
www.hodesweill.com.
*All U.S. regulated capital market and securities advisory
services are provided by Hodes Weill Securities, LLC, a registered
broker-dealer with the SEC, and a member of FINRA and SIPC, and
internationally, by non-U.S. Hodes Weill affiliates. All investment
advisory services are provided by HW Capital Advisors, LLC, a
registered investment adviser with the SEC.
About Cornell’s Baker Program in Real Estate
Cornell’s Baker Program in Real Estate is home to the Masters of
Professional Studies in Real Estate degree, a comprehensive,
graduate-level curriculum that educates the next generation of real
estate industry leaders. Cornell is also home to the Cornell Real
Estate Council, an extensive network of over 1,400 real estate
industry leaders, as well as the annual Cornell Real Estate
Conference. For more information, please visit
https://baker.realestate.cornell.edu/
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ICR on behalf of Hodes WeillJason Chudoba,
646-277-1249Jason.chudoba@icrinc.com