Global investors on drive to bolster real estate allocations in 2018
Global investors are on a drive to bolster their real estate allocations this year, according to the global Investment Intentions Survey 2018, published earlier this month by INREV, ANREV and PREA.
Despite the challenges of deployment, 56% of global investors intend to increase their exposure to real estate over the next 24 months, targeting an average 10.2% of total capital allocation. This would amount to a minimum commitment of just over €51b this year, according to the survey.
European investors are spearheading the drive and are expected to account for 57.7% of total investment capital into real estate globally this year, up from 49.9% last year, Henri Vuong, INREV’s director of research, told REFIRE. North America investors are expected to commit around 25.2%, with investors from Asia Pacific committing a further 17.1%.
Interestingly, Europe is also expected to attract the most investment capital, at 41.2%, followed by the Americas (35.1%) and Asia Pacific (17.4%). However, given that more than half of this allocation will come from Europe, the region could see a net outflow, while the Americas could see a net inflow of capital.
‘Europe is expected to benefit from the most investment because it’s very transparent compared to Asia,’ Vuong told REFIRE: ‘Yields have stayed low and gilt yields have not moved up. A lot of our respondents are pension funds who need to match their pension liabilities in the long-term and real estate continues to deliver,’ she added.
The UK is the top pick for 66.1% of investors in Europe, despite the country’s Brexit woes. France comes in second (62.5%), followed by Germany (60.7%). The extent of Spain’s recovery is also clear, jumping from 9th place in 2016 to number four this year, tied with the Netherlands, with both countries favoured by 33.9% of investors.
Around half of all investors want to increase their allocations to non-listed real estate funds. Asia Pacific investors have the strongest interest in increasing allocations to non-listed funds ahead of those from North America who are followed by European investors. A particular wave of enthusiasm in Europe is anticipated from investors based in Italy (66.7%) and Germany (50%).
Predictably, as deals become harder to source, investors are climbing up the risk curve once again. Around 50% of investors surveyed said that value-add is their preferred niche. The lure of opportunistic assets is not far behind, with almost 19% of investors targeting them, up from just 10.5% last year. As a result, the interest in core assets has slumped to 31.8%.
‘These numbers hide a story,’ said Vuong. ‘Investors are becoming more willing to take on more risk to get better returns. This mirrors 2006, where there was also not enough product. However, investors are still exercising caution and those around in 2006 will remember it well. Also, you can’t underestimate the weight of capital coming into the market. While there are parallels to be drawn with 2006, investors are not leveraging like they were then.’
Paris offices are top pick
Paris offices are the top pick for 55.4% of investors. Despite Brexit uncertainities, the weakness of sterling has boosted interest in London’s office market for 46.4% of investors. Berlin’s office market comes in third, at 44.6%.
‘Berlin is gaining far more interest and Munich continues to appeal to global investors,’ said Vuong. ‘However, Frankfurt may not benefit from Brexit to the extent some people expect. There’s a language barrier and for some potential new citizens, the city may lack aesthetic appeal.’
Investors are also continuing to bank on the retail sector, with 75% of investors surveyed saying it is second only to Europe’s office sector. Residential was hot on its heels, at 73.2%.
However, the lack of available product is still a major concern, with almost 40% of investors concerned about the well of suitable product drying up, citing it as a barrier to investing in non-listed real estate. Currency risk exposure is another obstacle cited by 37% of respondents, albeit primarily those from North America.
‘With current global allocations to real estate at 1.3% below target, the intended upswing suggests that more capital will continue to flow into the asset class,’ said Vuong. ‘This is clearly great news for our industry but, inevitably, the choices about where and when investors place their bets will be the key to determining success.’
Investment Intentions is a joint project between INREV, ANREV and PREA. The survey attracted 320 respondents comprising 107 investors, seven fund of funds managers and 206 fund managers. Their total combined real estate AUM totals €427b. (ssk)