Institutional investors’ average target return for real estate is 8.2%, compared to average actual returns of 11.8% in 2014, 11.4% in 2013 and 9.6% in 2012, said a report released Wednesday on real estate investment by global asset owners from Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, a real estate advisory firm.
Endowments and foundations have the highest average target return for real estate at 8.9%, followed by private pension plans with an 8.2% target return and public pension funds with an average target return of 7.9%, according to the report, the third annual Institutional Real Estate Allocations Monitor.
However, in 2014, sovereign wealth funds — which have a target return of 7.4% — had the highest actual real estate return at 14.1%, followed by endowments and foundations at 12.9% and private pension funds at 12.8%.
This was the first year the executives at Cornell University’s Baker Program and Hodes Weill asked for return information, said Douglas M. Weill, managing partner based in the New York office of Hodes Weill & Associates, in an interview.
“I was surprised to see that returns have gone up each year,” Mr. Weill said.
While in the U.S. the view is that real estate returns were moderating, on a global basis, real estate returns have continued momentum, with the pace of returns picking up, he said.
Sovereign wealth funds had the highest three-year average annualized return of 13.3%, compared to the three-year average for all institutions of 10.9%. Endowments and foundations earned the next highest three-year average return of 12.4%, followed by private pension funds with 11% and public pension plans with 10.9%.
However, Mr. Weill expects that institutions are likely to bring down their expected returns for real estate next year. However, expectations will most likely vary depending on the region with European institutions expecting stronger returns than U.S. institutions, Mr. Weill added.
Even with lower expectations, the global average target allocation is expected to rise in 2016 to 9.85%, the report shows. By comparison, the average target allocation to real estate is 9.56% this year, up from 9.3% in 2014 and 8.9% in 2013. Overall, 30% of survey participants increased their target allocations this year, while 13% decreased their targets.
The survey was conducted from May through October with 242 institutional investors responding.
