Even though returns are expected to slip in 2020, real estate could provide a relatively safe haven in the event of economic squalls because of its income component.
But investors should beware of taking on more risk to maintain returns and relying on the liquidity of trophy properties in their portfolios.
The low-economic-growth environment is leading asset owners to continue investing in real estate for the income as well as some property appreciation, industry experts say.
"Going into 2020, the environment looks more attractive for real estate, at least for the short term, than we would have anticipated," said Lee Menifee, Madison, N.J.-based managing director and head of Americas investment research at PGIM Real Estate, which has $175.9 billion in assets under management.
But there are caveats, he said.
For example, overall foreign investment — dominated by Canadian investors — in the U.S. dropped in 2019, which raises concerns for the liquidity of larger properties in gateway cities, he said.
Foreign investments account for 10% to 15% of transactions in the U.S. overall but foreign investment is higher in gateway markets, Mr. Menifee said.
Overall, cross-border transactions fell worldwide fell to 26% in the third quarter from 38% at year-end 2018, according to a PGIM Real Estate global real estate trends report.
"Institutional investors' target allocations to real estate remain firmly above 10%, and many continue to expand their allocations," said Nancy I. Lashine, New York-based managing partner and founder of placement agent Park Madison Partners LLC.
Currently, investors' average target real estate allocation is 10.2%, larger than all other alternative investment allocations except for hedge funds (13.2%), according to Preqin. By comparison, asset owners worldwide had an average target private equity allocation of 9.9%, private debt of 6.3%, natural resources of 5.6% and infrastructure, 5.5%, Preqin data shows.
What's more, 51% of global institutional investors surveyed by the London-based alternative investment research firm in June expect to commit the same amount of capital to real estate and 28% expect to commit more capital to real estate in the next 12 months than they did in the previous 12 months. The remainder expects to invest less.
"In 2020, the big picture is that we continue to live in a lower-for-longer environment and real estate looks attractive," Ms. Lashine said.
Some investors are looking for real estate with a value-added component, she said.
Indeed, more global asset owners think that value-added and opportunistic real estate offer the best investment opportunities, opposed to core and core-plus, Preqin's survey results show. Some 46% think that value-added and 44% consider opportunistic properties the best real estate bet compared with 27% for core-plus and 24% for core.
Even so, fundraising remains competitive across all strategies, she said.
The number of real estate funds in the market seeking capital is at an all-time high while the number of funds reaching a final close continues to trend down, Ms. Lashine said.
The number of real estate funds being raised has been increasing steadily since January 2015, Preqin data shows.
As of October, there were 856 real estate funds in the market worldwide, seeking $251 billion in total commitments. By comparison, in January 2019, there were 634 real estate funds in the market attempting to raise a total of $219 billion.
In the first three months of 2019, 188 real estate funds closed raising a combined $121 billion, according to Preqin.