On Thursday, October 29th, 2020, Doug Weill (’88) presented the eighth annual Institutional Real Estate Allocations Monitor, a survey of global institutions including pension funds, sovereign wealth funds, insurance companies, endowments, and foundations. Leveraging the academic resources of Cornell University’s Baker Program in Real Estate and the institutional advisory experience of Hodes Weill & Associates, the Allocations Monitor assesses institutional investment allocations and objectives in real estate on a global basis. In 2020, 212 institutional investors from 29 countries participated in the survey, representing about $1.3 trillion of real estate assets under management.
The results of the Allocations Monitor showed that more institutions are investing in real estate as an asset class. Target allocations to real estate continued to rise globally, although the pace of year-over-year pace growth has moderated. Institutions raised their real estate allocations to an average of 10.6% in 2020, up 10 bps from 2019, and up 170 bps from 2013. If you estimate global AUM at $100 trillion, 10 bps equates to an additional $80 to $120 billion of capital allocations to real estate. In the next twelve months, target allocations, led by institutions in EMEA and Asia Pacific, are forecasted to increase by an additional 30 bps.
Actual allocations increased meaningfully year over year, from 9.4% to 10.0%. While actual allocations still remain under-invested by 60 bps relative to target allocations, this is a smaller margin than the survey has reported in years past. Much of this could be attributed to the denominator effect, as institutions responding to the survey in the earlier months of the year witnessed their investments in public equities lose a significant amount of value. As the public equities market rebounded, survey participants who responded in later months indicated that the margin between actual and target allocations had begun to increase once again.
Still, real estate continues to outperform as an asset class, and investors continue to see real estate as an attractive investment opportunity on a risk-reward basis. Actual real estate returns for institutional portfolios outpaced target returns in 2019 by 20 bps. Investor conviction in the asset class increased for the third year, reaching a 6-year high. Amidst the pandemic and geopolitical concerns, many institutions anticipate future buying opportunities as distress and dislocation become more prevalent throughout the market.
Most institutions do not manage their own real estate portfolios, but rather outsource them to third-party managers. Overall, 91% of institutions reported outsourcing all or a portion of their portfolio, with only 9% managing their real estate allocations fully in-house. Regarding new investments, 62% of institutions planned to re-invest with existing managers, 24% expected to form new manager relationships, and only 12% intended to invest with emerging managers.
Preferences for risk and geography have shifted among institutions, but allocations to investment products have mostly remained the same. More institutions reported moving towards opportunistic strategies in anticipation of market volatility. Geographically, global capital is still moving across borders, with North America as the most prominent target market. Still, many institutions are focusing on “home country” investments, as travel restrictions have limited the ability to conduct on-site diligence and property tours. Preferred investment products for institutions are closed- and open-end funds, but larger institutions continue to favor direct investments, joint ventures, and separate accounts.
Lastly, more institutions are placing an emphasis on ESG when making investment decisions. Roughly 47% of institutions have a formal ESG policy, with Europe and Australia taking the lead in implementation.
We thank Doug Weill ’88 for sharing these insights and Matt Hershey, Partner at Hodes Weill, for leading the discussion on institutional trends with our panelists: Paul Von Steenburg ’04, Managing Director of Commonfund; Gerald Fang, Head of Americas Real Estate, Abu Dhabi Investment Authority (ADIA); and Pamela Thomas, Head of US Real Estate Investment, CPP Investments.
