Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates fifth annual Institutional Real Estate Allocations Monitor (the “Allocations Monitor”) revealed that global institutional investors’ average target allocation to real estate surpassed the 10% threshold. This important milestone highlights real estate’s sustained attractiveness as a portfolio diversifier, producer of stable income and hedge against inflation. This sentiment is reflected in the steady growth in allocations to real estate that the industry has experienced since 2013—the year in which the survey was first conducted. Since then, institutional portfolios have increased their exposure to real estate by approximately $0.5 trillion in total value, through a combination of capital appreciation and new investments.
While real estate should continue to remain an important fixture in institutional portfolios, the Allocations Monitor reveals that a combination of frothy valuations, geopolitical unrest, possible interest rate increases and global capital markets volatility has caused confidence in the asset class to wane. These factors have led to institutions becoming increasingly judicious with their investment programs—a trend that is evident when considering that the average actual allocation to real estate is 9.1%, 100 basis points below the average target.
Despite a decline in conviction, the fact remains that on a global basis billions of dollars of capital remain earmarked for investment in real estate. To that end, the Allocations Monitor shows that 22% of institutional investors surveyed indicated that they expect to increase their target allocations over the next 12 months. Given the considerable weight of capital seeking real estate exposure and the pressure to invest, a number of institutions have shifted to more defensive strategies including credit, net leases and niche asset classes such as student housing. Reflective of this trend, year-to-date more than $12.2 billion of capital has been invested in funds focused on credit alone, representing 16% of capital raised.
To learn more about the role of real estate in institutional portfolios, and the impact of institutional allocation trends on the investment management industry please download the full report. The year’s 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.