Germany ousted as favoured destination, but Berlin tops city choice

A minimum of €52.6 bn of capital is expected to be invested in global non-listed real estate funds this year, according to the latest global Investment Intentions Survey 2017, published by INREV, ANREV and PREA. This represents a total average target allocation of 11.5% for investors - a gain of 1.5% from current allocations.

The results, based on responses from 314 investors, underline ongoing confidence in global real estate markets, despite continuing global economic and geopolitical uncertainty.

More than half of investors who took part in the survey intend to increase their global real estate allocations within the next two years. European investors in particular, are keen to boost their allocations to 11.5% from today's 9.4%. North American investors are aiming for 12.1%, up from 11.3%, and investors from Asia Pacific want to grow their real estate allocations to 10.4%, up from 8.4%.

According to Henri Vuong, INREV’s director of research and market information, "The rise in capital allocation to real estate investment suggests a robust story for the coming year. There were obvious questions and concerns raised about certain markets that have historically been seen as bomb-proof, but this simply reflects the healthy ebb and flow in sentiment that comes with sophisticated investment decision making. Time will tell, but the survey points to a positive prognosis for the real estate investment industry, with non-listed funds driving access for many investors.’

European investors are expected to spearhead the investment charge this year, according to the survey, and are expected to account for almost half – or 49% - of all investment, followed by North American investors with 36.3% and Asia Pacific investors with 13.8%.

However, this does not mean that the majority of capital is headed for Europe. In fact, the US is expected to attract the largest share of investment, at 40.9%, followed by Europe, with 36.4% and Asia Pacific, with 18%. The Americas – excluding the US – is expected to attract a small but growing 4.8% share, suggesting that we could see increased diversification on the part of investors this year.

Interestingly, there has been a shift in investor sentiment relating to specific European markets. Germany took the top spot last year but has been replaced by the UK and France as the joint top pick for this year – both of which were selected by 74.1% of investors. In fourth place is the Netherlands – retaining its position from last year – with Spain jumping four places to number five.

Fund of fund managers voted slightly differently, with all of them identifying Germany and France as their top investment targets.

The office sector is investors’ favourite asset class this year, followed by retail in second place and industrial/logistics in third. Residential assets come in fourth, followed by student housing.

The majority of investors identified German offices, French offices and German retail as their likely top three choices for real estate allocation in 2017. In Germany, investors have a preference for office and retail assets, whereas in the UK and France, interest is spread more broadly.

There has also been a shake-up this year in the top cities investors are targeting. London has fallen off the top spot to number four, suggesting that investors remain cautious about a post-Brexit Britain. As a result, Berlin claims the top spot this year, with all respondents citing it as their top pick (48.9%), followed narrowly by Paris, with 48.3% and Frankfurt with 46%.

Nearly half of investors (48.7%) selected value-add above core (40.8%) as their preferred investment type for the second year running, reflecting an increasing shift towards a greater appetite for risk. However, most investors are not ready to scale the heights of the risk spectrum, with just 10.5% citing opportunistic assets as their priority.

In a reversal of sentiment from last year, the majority of investors identified non-listed real estate funds as the best route to market, with 42.3% expecting to increase their allocations to such vehicles. As such, they outstripped joint ventures and club deals, which came in first last year, falling to second place this year, with 38.8%. Separate accounts – last year’s fourth preferred vehicle type – are in third place this year, swapping places with direct real estate at 38.8% and 23.1%, respectively.

Nonetheless, on a weighted basis, larger investors still tend to favour joint ventures and club deals, separate accounts and direct investment.

Diversification and access to expert management remain the key drivers to invest in non-listed real estate funds, according to the survey. However, the availability of suitable product and the ability to deliver target returns remains a challenge for fund managers.