Global institutions are increasing their allocations to commercial real estate assets as confidence in the sector remains high.
The appetite for CRE investment among the world’s largest investors has reached a 7-year high despite concerns about asset valuations and weakening economic growth.
The annual Real Estate Allocations Monitor from Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate, shows that institutions’ view of CRE from a risk-return standpoint increased from 5.1 to 5.7, reflecting that returns have exceeded return targets.
“Globally, we’re in a yield-starved environment, and real estate has proven to be one of the few asset classes where investors can still find yield without exposure to excessive risk,” said Douglas Weill, Managing Partner at Hodes Weill & Associates. “This is the primary reason why we’re seeing a flight to safety in real estate. However, there remains a significant amount of dry powder on the sidelines as good investments become harder to find – which could explain why institutions remain meaningfully under-invested relative to target allocations.”
Target allocations increase
Target allocations to CRE gained 10 basis points to 10.5% this year and implies the potential for an additional US$80 to US$120 billion of capital to be allocated to real estate over the coming years.
While there is some evidence that growth in allocations appears to be moderating, the report still forecasts a further 10 basis point rise in 2020, driven by institutions in the Americas and Asia Pacific.
Real estate is an important and growing allocation in institutional portfolios,” said Dustin Baker, Director of the Baker Program in Real Estate at Cornell University. “Despite concerns about late-cycle risk, real estate fundamentals – including supply and demand trends – remain broadly favorable. This has been driving strong returns, which in turn is contributing to continued liquidity in the asset class.”