What is the outlook this year for investing in real estate? Institutional Real Estate Inc has just published its 21st Annual Investor Survey and here are some of its findings. The purpose of the survey is to identify and understand the investment trends that are driving the decisions of the largest and most influential real estate investors around the world. Note — investors, not investment managers.
The web-based survey, supplemented by follow-up phone calls and interviews, was launched on 18 October 2016. 85 percent of responses were submitted after the US presidential election, so the respondents were aware of the outcome. 164 responses, representing aggregate assets under management of $7.93 trillion (€TK trillion), were received by 11 January; 113 from US respondents (69 percent of responses; AUM of $3.50 trillion/€TK trillion), 51 from non-US investors (31 percent of responses; AUM of $4.43 trillion/€TK trillion).
The breakdown of the investor universe for the survey between US investors and non-US investors tells us a lot about the different investor types out there, and their prevalence.
For US respondents, 44 percent were public pension funds, 15 percent were endowments and 12 percent were corporate pension funds. Insurance companies accounted for 6 percent and sovereign wealth funds 2 percent. Funds of funds scored 3 percent.
For non-US respondents, 18 percent were corporate pension funds and 17 percent were public pension funds. Insurance companies accounted for 21 percent and sovereign wealth funds 8 percent. Funds of funds scored 14 percent. The difference in investor profile between the two groups is palpable.
On asset allocation to real estate, we didn’t distinguish between the two investor groups. The survey found that actual allocation this year was higher than target allocation, at 8.81 percent of total assets against 8.54 percent. The numbers are very close to those found in the 2007 survey 10 years ago of 8.30 percent and 8.70 percent, respectively; but both are well up on the 5.43 percent and 5.84 percent, respectively, of the 2000 survey.
Among US institutional investors’ target portfolios, core and core-plus real estate continue to comprise roughly half, with investors’ targets increasing to 54 percent from 53.3 percent in 2016. This is negligible in terms of any real change in allocations.
In terms of higher-yielding strategies, US investors generally split their target allocations between opportunistic and value-added strategies but they decreased their opportunistic allocations to 10.5 percent from 15.7 percent in 2016. This is quite revealing in that we’re looking at a substantial reduction of one- third in new allocations. Value-added targets increased to 18.4 percent from 16.9 percent in 2016.
US investors’ target allocations to foreign real estate decreased to 3.1 percent from an all-time high last year of 7.3 percent. This is also quite meaningful: a reduction of more than half. Three immediate suggestions are that: US investors may now prefer to stay at home; they are not buying the international diversification argument so readily; and they reckon they know where the best opportunities are.
For non-US institutional investors, 76.3 percent of their allocations are targeted at non-US investments. And not necessarily in their domestic market.
For both US and non-US institutional investors, 50 percent of non-US investments are allocated to European core and value-added investment styles.
US institutional investors’ international focus remains on European value-added strategies (24 percent of projected non-US investments) and European opportunistic strategies (30 percent of projected non-US investments).
For non-US investors, the emphasis, both for actual and planned new capital, is on European core.
Globally, the United States and northern Europe are generally viewed as the most attractive regions for new investments, while Russia continues to be the least attractive market both for US and non-US investors.
On property type, non-US investors align with US investors in their belief that the industrial/logistics and multifamily sectors are the most attractive at present.
US investors are maintaining weightings to core and value-added real estate and decreasing target allocations to opportunistic and non-US investments. Non-US investors are emphasising European core (but we know that there is not much of it about, and what there is is expensive). Globally, US real estate is increasingly viewed as a safe haven.