Allocations grow a bit, but don’t expect a flood of cash

Institutional investor real estate allocations grew by a percentage point and similar growth is expected in 2007, according to the results of two surveys obtained by Pensions & Investments.

But the flow of capital into the asset class from U.S. pension plans, endowments and foundations is expected to slow because these investors already are close to their expected 2007 real estate allocations.

For the first time since 2002, capital flow into real estate from new institutional investor allocations is expected to drop. Some 22% less capital is projected to flow into real estate — $46 billion from $59 billion in 2006, according to this year’s plan sponsor survey by San Ramon, Calif.-based Institutional Real Estate Inc. The study was conducted by Kingsley Associates in San Francisco.

Also, preliminary 2006 data from Hartford, Conn.-based Pension Real Estate Association’s annual institutional investor survey indicates private real estate equity as a proportion of total plan assets increased about one percentage point in 2006, but overall, the target allocations increased very slightly, driving down the difference between target or policy allocations and actual investment to about 1% on average in 2006, explained Jim Clayton, PREA’s director of research.

IRE/Kingsley’s survey respondents expect the difference between target and actual real estate allocations this year to be even tighter, at 0.4%.

On the rise

Target real estate allocations have been rising steadily since 2004, data from both surveys show. In 2006, investors’ mean reported target allocation to equity real estate was 8.01%, up from 7.98% the year before, according to PREA. Actual allocations grew to 6.9% of total assets, up from 6.05%, during the same period.

IREI/Kingsley data also show a consistent increase in target real estate allocations by about a percentage point a year since 2004.

The one percentage point rise in institutional allocations is meaningful, Mr. Clayton said. “Real estate is becoming more of a mainstream asset class,” he said.

Real estate investors chose riskier forms of real estate in 2006. Last year, investment in core properties decreased 7.1 percentage points to 61% of the average real estate portfolios, from a year earlier, PREA reported. Meanwhile, 20% of overall real estate portfolios was invested in value-added real estate, a two-percentage-point increase from 2005; and 19% was in opportunistic real estate, almost four percentage points above the previous year.

IREI/Kingsley data also show decreasing target allocations to core real estate, with expected 2007 mean allocations at 46.8% of overall portfolios, down from 48.8%, and value-added allocations falling to 19.5% from 20.7%. Opportunistic allocations are expected to rise slightly to 9.5%, from 9.3%.

Allocations to real estate investment trusts, which dropped about two percentage points to 10.1% in 2006, are expected to rise to 14.7% this year, the IREI/Kingsley noted.