Investors expect to increase their allocations to real estate from 9.5 per cent to 10.3 per cent of their overall portfolios, according to the latest INREV Investment Intentions Survey.
The report estimates that the 142 institutional investors participating in the study expect to invest almost EUR35bn into real estate globally this year.
Growth is being driven by strong demand from investors in the Asia Pacific region. Over half of those surveyed (53.8 per cent) are expecting to increase their allocations over the next two years.
European investors also have an optimistic outlook on the market, with 48.9 per cent of respondents saying they expect to increase their allocations. There is more caution amongst North American investors as only 26.9 per cent plan to do the same while the majority (61.5 per cent) do not expect allocations to change. More stable economic conditions and a weak correlation with bond and equity markets mean that real estate remains a popular choice for investors looking to diversify their portfolios. This was borne out in the survey findings, with diversification benefits cited by investors and fund of funds managers as the top reason to invest in real estate, scoring an average importance rating of 4.2 (out of five), up from 3.9 last year.
For Europe, the survey results suggest that interest in joint ventures and club deals, which remains high, may now have passed its peak. Over a third (36.6 per cent) of respondents expect to increase their allocations to these products, which is more than ten percentage points lower than a year ago.
Debt will be a popular investment target over the next two years. Overall, 25.2 per cent of investors expect to increase their allocations to real estate and mortgage debt, with large investors in particular looking to increase their exposure to debt markets. And fund managers of all sizes continue to launch real estate debt products.
“These results show a stabilisation of confidence amongst investors with increased allocations to real estate, which is good news for the sector,” says Casper Hesp, INREV’s director of research and market information. “There are also signs of a potential change in emphasis with investors searching for the optimum way to structure their portfolios to achieve the ideal investment mix.”
There was good news for the non-listed real estate sector as the percentage of investors saying they expect to reduce their allocation to non-listed has fallen significantly, from 30.5 per cent in 2013 to 18.5 per cent. With the proportion of investors wishing to increase their allocation to non-listed real estate funds remaining almost unchanged from last year, the result is a higher net balance in favour of non-listed funds – notably from smaller investors – bucking the downward trend of the previous three years.
Germany, France and the UK have been the top investment priorities throughout the financial crisis and it is no surprise that they will remain so in 2014. Buoyed by strong support from domestic investors, Germany remains the top European country, with 58.3 per cent of investors and 70.5 per cent of fund managers expecting to invest there this year. However, the UK is the preferred location for cross-border investment.
UK offices is the most popular country and sector combination preferred by 45 per cent of investors. Then comes the French offices sector (favoured by 44 per cent of investors), followed by Germany offices (preferred by 43 per cent of investors).
Retail was the most popular sector overall for investors and fund managers, while there was a noticeable increase in interest in residential, suggesting that this sector is proving its viability.
Outside of the core markets, Spain, recognised as the most popular of the ‘club Med’ economies, looks set to be on the comeback trail in 2014. According to the Survey, 41.7 per cent of fund of funds managers, 31.3 per cent of fund managers and 22.6 per cent of investors expect to invest there this year.
“The global Investment Intentions Survey reflects a generally positive sentiment across the industry as we enter 2014. And while we see some familiar anticipated behaviours -such as European investors adopting a mostly defensive strategy and their US and Asian counterparts being more opportunistic – in Europe there are also interesting shifts in attitude with a growing appetite for risk. These results suggest an industry in the midst of change,” says Matthias Thomas, CEO of INREV.