Gap between actual and target allocations to real estate narrows dramatically, says INREV
Current average allocations to real estate increased to 10.0 per cent from 8.9 per cent in 2018, against an increase in target allocations from 10.2 per cent to 10.4 per cent, significantly narrowing the gap between the two for the first time, according to the global Investment Intentions Survey 2019, published by INREV, ANREV and PREA.
However, global institutional investors remain bullish about real estate indicating their intention to place a minimum of EUR72.4 billion of new capital into the asset class in 2019, continuing the recent trend of positive sentiment. Around EUR47.6 billion of this total is earmarked for non-listed vehicles.
Half of all investors will increase their allocations over the next two years, while only 9.3 per cent expect to decrease their allocations, and 40.7 per cent anticipate no change.
Looking at the AUM-weighted results, 80.4 per cent of investors intend to increase allocations, indicating that larger investors will likely commit more than their smaller counterparts.
On a regional basis, the majority of European investors expect to increase their allocations, while most of those from Asia Pacific and North America expect no change. More North American investors will decrease their commitments, than their counterparts in other regions.
Diversification and enhanced returns remain the two main benefits attracting all investors to the asset class.
For investors targeting Europe, there’s been a significant shift in favour of core, which rose from 31.8 per cent to 39.1 per cent, while opportunity dropped from 18.8 per cent to 9.8 per cent. In comparison, value added retains its status as the preferred investment style overall, with 51.1 per cent of investors still attracted to the risk-adjusted return prospects it offers.
These results suggest investors may be taking a more risk-averse approach to their real estate investments, in preparation for the approaching late stage of the current cycle.
Overall, the UK, France and Germany remain the dominant European destinations for investors, though the order of priority has shifted since the last survey. This year Germany topped the list of preferred investment locations, selected by 66.7 per cent of respondents, while the UK – number one in 2018 – is second at 64.6 per cent, and France is third at 62.5 per cent.
Funds of funds managers expressed a different order of preference placing the UK top, with the Netherlands second, followed by Spain. But while London / office is still at number three in the list of preferred city / sector combinations, European investors are less enthusiastic about the UK than their counterparts from North America and Asia Pacific.
It seems likely that the reality of Brexit has affected sentiment on the UK, and this year’s respondents are indicating that Germany will be one of the beneficiaries.
The office sector remains the most popular, selected by 93.8 per cent of investors, followed by retail at 75.0 per cent, residential at 70.8 per cent and industrial at 60.4 per cent.
Interestingly, investor interest in alternatives is also growing. At 33.3 per cent and 31.3 per cent, respectively, student accommodation and healthcare have become increasingly appealing. However, for these sectors to have a more meaningful impact on their traditional rivals, they will need to increase in scale and investors will need to acquire new skills to get comfortable with different operating models.
Over 50 per cent of investors already invested in non-listed real estate funds in Europe will increase their allocations to these vehicles in the coming 24 months. Commitments to JVs and club deals appear to be slowing down relative to previous years, though nearly 57 per cent of international investors expect to increase their allocations.
This year and next, most investors will increase or maintain their commitments to directly held real estate and separate accounts, reflecting the ongoing desire for greater control. Separate accounts witnessed the strongest growing trend in commitments signalling the high demand for this route into real estate.
Commenting on the survey results, Lonneke Löwik, INREV’s CEO, says: “With considerable amounts of cash continuing to flow into the market, investors are clearly focused on long-term investing. But, given that real estate cycles are typically 10 years one can say that we’re now in the late stage of the current cycle. The key questions raised are how are investors preparing themselves for an inevitable rise in interest rates, and how will this affect their investment decisions this year and their intentions to increase allocations beyond 2019.”