Global institutional investor appetite for commercial real estate is the highest it's been in seven years, according to an annual survey conducted by Hodes Weill & Associates and Cornell University's Baker Program in Real Estate
The seventh annual Institutional Real Estate Allocations Monitor, which surveyed 212 institutional investors in 24 countries, found that average target allocations to real estate increased 10 basis points to 10.5% in 2019, up some 160 basis points since 2013.
"Globally, we're in a yield-starved environment, and real estate has proven to be one of the few asset classes where investors can still find yield without exposure to excessive risk," said Douglas Weill, managing partner at Hodes Weill & Associates, in a news release announcing the survey results. "This is the primary reason why we're seeing a flight to safety in real estate."
Mr. Weill added: "However, there remains a significant amount of dry powder on the sidelines as good investments become harder to find, which could explain why institutions remain meaningfully under invested relative to target allocations."
On average, institutional investors expect to increase their target allocations to real estate by an additional 10 basis points over the next 12 months. The expected increase is being driven by institutions based in the Americas and Asia-Pacific, with each region forecasting increases of 20 basis points, while target allocations for investors based in Europe, Middle East and Africa are expected to remain flat.
The survey also found that institutions remain significantly underweight to real estate relative to target allocations, at 9.4%, about 110 basis points below target. The margins are even larger in the APAC and EMEA regions, which are under allocated by 150 and 170 basis points, respectively.
In total, half of institutions surveyed are under invested relative to target allocations by an average of 190 basis points, because, as one APAC-based sovereign wealth fund noted, of the increasing challenge of investing in real estate as return projections decline.
Institutions reported an average return of 8.8% in 2018 — a decline of 30 basis points from the previous year. On a three- and five-year basis, asset owners have seen average returns of 8.9% and 9.9%, respectively, well above target returns of 8.3%.