Preqin looks in detail at investors’ allocations to real estate to assess how they are changing, and how, in light of current investor sentiment, these allocations may be impacted in the coming years.
Institutional confidence in real estate has increased significantly in 2014. The Preqin Investor Outlook: Real Estate, H2 2014, Preqin’s most recent study of institutional investors in real estate, demonstrates that many investors plan to increase their allocations over the longer term as a result of increasing satisfaction with returns.
Investors’ average current and target real estate allocations have slowly increased, with the average current allocation increasing from 6.7% of total assets under management in 2011 to 7.6% in 2014. Correspondingly, the average target allocation of investors has increased from 9.1% to 9.7%, as real estate has becoming increasingly important in investors’ portfolios, with many institutions growing their exposure to the asset class.
While there is considerable variation between different groups of investors, in all cases, the average target allocation is larger than the average current allocation, a reflection that a large proportion of institutions are below their targeted level of real estate exposure. As a result, more capital is likely to flow into the asset class in the coming years, as investors increase their level of investment in order to move towards their target allocations.
The past 12 months have seen confidence in real estate increase among institutional investors, with 32% of investors believing that returns have exceeded expectations over the past 12 months, compared to just 10% of investors which stated so in H2 2013. Correspondingly, the proportion of investors which stated that returns had fallen short of expectations has declined from 25% to 15% over the same timeframe.
When asked about their general perceptions of the real estate fund industry at present, investor responses vary by region; North America-based institutions have the most positive outlook, with 58% of investors perceiving the asset class positively, compared to 44% of Asia-based investors and 14% of Europe-based investors. The vast majority of Europe-based investors (86%) view real estate in a neutral light, with none perceiving the asset class negatively. Although many European economies have been slower to recover from the downturn than those in other regions, the more positive economic outlook and corresponding improvement in real estate fundamentals may lead to a return of confidence among investors based in Europe in the coming year.
As a result of both increasing confidence and the need for many institutional investors to further diversify their portfolios to generate the returns they require to meet their obligations, it is perhaps unsurprising that many investors are planning to increase their allocations. Forty-one pe rcent of institutions surveyed in H2 2014 plan to increase their allocation to real estate over the longer term, compared to 31% of investors which stated so just six months ago.
Regionally, however, there are notable variations regarding which investors plan to increase their allocations over the longer term. Europe- and Asia-based investors are the most likely to increase their real estate allocations, with 71% and 56% respectively stating that they plan to do so, compared to 26% of North America-based institutions.
Investors located in Asia in particular are likely to be important investors in the asset class in the next few years, as many that have previously been domestically focused begin to seek international exposure. Investors based in Asia have real estate allocations below the global average, with the average current allocation standing at 6.9% and the average target allocation at 8.7%. However, as these institutions look to increase their allocations to the asset class, they may start to move closer to the average current and target allocations of Europe-based investors, which stand at 10.2% and 12.1% respectively. One Asia-based investor seeking to commit capital to international funds is Thailand Government Pension Fund, which is looking to commit to two private real estate funds in the next 12 months. The pension scheme expects to invest USD30m (THB960m) and is interested in both Asia and Europe.
The growing confidence among investors regarding their portfolios is further reflected in the amount of capital they plan to commit to the asset class in the next 12 months. Fifty-five percent of active institutions plan to commit USD100m or more to private real estate in the next 12 months, compared to 40% that stated so in H2 2013.
Many investors are planning to make their maiden commitments to the asset class, or are seeking to return to making investments having been inactive. Tatra Banka, a Slovakia-based bank is considering making its maiden allocation to private real estate funds in Q4 2014, committing up to EUR30m across one or two core or core-plus private real estate funds targeting Central and Eastern Europe. These investors highlight the importance to fund managers of going beyond their capital base to source capital, with many institutions across a variety of regions targeting new commitments in the year ahead.
As the performance of the real estate asset class has improved in recent years, investor confidence is returning and allocations to the asset class are likely to rise in the next few years. This is most likely to be the case among Europe- and Asia-based institutions. In particular, greater numbers of Asia-based investors are looking to invest internationally, with these institutions likely to be an important source of capital for managers raising Europe- or North America-focused funds. The fundraising market remains a challenging one, and while there is a large pool of institutional capital set to enter the asset class in the coming years, fund managers may need to cast the net wide to be successful in raising capital, and be prepared to target investors across the globe.
This is an excerpt from Real Estate Spotlight – October 2014.
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