This is the first article in a summary series of the 2016 Cornell Real Estate Conference.
The 2016 Hodes Weill (HW) Institutional Real Estate Allocations Monitor and its findings were presented and discussed at the Cornell Real Estate Conference on October 13-14 in New York City. Baker Program in Real Estate director Dustin Jones and Douglas M. Weill (SHA ’88), opened the discussion panel by presenting the trends discovered via the survey and the implications for real estate investment markets around the world.
The panel was moderated by David Hodes, co-founder along with Doug Weill of Hodes Weill & Associates. The panel was comprised of senior investment professionals from leading global institutions including GIC, ADIA and Ivanhoe Cambridge, including Cody Danks Burke (MBA ’06), Adam Gallistel, Gary Phillips and Bill Tresham.
Not surprisingly, the discussion value reflected many of the findings in the report. Their sentiments were positive, however, despite the general consensus that the real estate market may be in the later stages of an uptrend. With that established, the next question is whether the next downturn in prices be severe in the style of 2007-10 or milder, like the 2000-02 downturn.
Sameer Godiwala (Baker/MBA’17) commented that “I worked in hotel investments over the summer, an asset class which tends to have the most volatile risk/return profile. To see the broader picture in the presentation and the real-world reflections and opinions of the panelists reminded me that volatility can actually drive returns, especially if a manager’s strategy can generate alpha beyond the market return. It is great to see the stature of real estate continue to increase as an asset class.”
For the full 2016 Hodes Weill Institutional Real Estate Allocations Monitor, please visit:
2016 Hodes Weill Allocations Monitor
Several highlights of the discussion:
- Many institutions are short of their target allocations to real estate
One of the findings of the HW monitor was that, while real estate is trending toward a 10%+ institutional portfolio allocation across the board, those same institutions remain broadly under-invested relative to target allocations. The panelists, in particular Bill Tresham, attributed this to the fact that the types of deals and IRR that are sought are scarce at this stage in the cycle. On that note, he expects that allocations will grow once prices fall further and cap rate expand “into the wheelhouse” of most institutions.
- Institutional real estate portfolios continue to demonstrate strong investment performance
Adam Gallistel and Gary Phillips discussed their firm’s strategies and performance, noting that, while many institutions and investors may be getting nervous about the length of the cycle, that performance has been strong. This went along with the findings of the HW monitor that real estate (all strategies) have generated an average annual return of 10.7% over the past four years. Of the institutions surveyed, the average target return across all strategies was 8.4%. Furthering the case for the U.S. real estate market, institutions focused on the Americas posted an average return of 11.8%.
- Interest in core, value-add and opportunistic strategies continues to trend upward
Like any investment strategy, the goal of real estate investing is to outperform the market, or the return one could get via a passive investment in a corresponding market index. In other words, engaging in a strategy which will generate the most alpha, that in excess of the return provided by the market. The HW report found that, by a wide margin, those institutions which are focused on value-add strategies are performing the strongest, followed by institutions focused on opportunistic strategies. Cody Danks Burke commented in agreement that the “performance of higher-yielding strategies confirm that investors are diversifying their investments. For example, ten years ago hedge funds were seen as the ticket to higher, alpha-driven returns. That has shifted in part to actively managed real estate strategies.”
