Institutions Raise Target Allocations to Real Estate in 2019

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An annual report from Hodes Weill and Columbia University shows real estate remains a preferred asset class among global institutions.

Global institutions continue to raise their allocations to real estate, according to the latest Allocation Monitor survey from Hodes Weill & Associates and the Columbia University Baker Program in Real Estate.

The survey, based on responses of 212 institutional investors, found that institutions increased their weighted target allocations to real estate to 10.5 percent in 2019—a 10-basis-point increase compared to last year, which translates into a dollar volume of roughly $80 billion to $120 billion of additional capital coming into the space.

The 10-basis-point increase is slightly smaller than in prior years. Between 2017 and 2018, target allocations increased by 30 basis points and between 2016 and 2017, they increased by 20 basis points. Looking forward, respondents said they expect allocations in 2020 to the sector is expected in 2020 to grow 20 basis points.

Among specific institutions, the California State Teachers’ Retirement System reported one of the largest increases in target allocations to the sector in 2019—by 200 basis points, to 15 percent of its allocations and roughly $241 billion assets under management.

Meanwhile, Norway’s Government Pension Fund Global reported one of the biggest drops in target real estate allocations, by between 200 and 400 basis points, to 3 percent to 5 percent of its allocations and $982 billion assets under management. Los Angeles County Employees’ Retirement Association reported the second biggest drop, by 300 basis points, to 8 percent of allocations and $58.4 billion under management.

In 2020, the majority (69 percent) of institutions expect to maintain real estate allocations at their current level, while 24 percent plan to increase allocations and 7 percent plan to decrease them.

Actual allocations

While target allocations to the real estate sector have risen in 2019, institutions reported that actual allocations stayed flat. Overall, they remained under-invested compared to targets by 110 basis points. The difference was narrower for institutions based in the Americas, which were underinvested by 70 basis points. Part of the reason is reportedly the difficulty of redeploying capital gained from previous investments in the current market climate.

For the past several years, however, actual returns institutions have realized from investments in real estate have outpaced target returns. In 2018, for example, all institutions set a target return of 8.2 percent for the sector. The actual return achieved was 8.8 percent. The gain was even larger for institutions based in the Americas, with an actual return of 9.2 percent vs. an expected return of 8.5 percent.

Investment Strategies

Value-add plays were the most popular investment vehicle for institutions in 2019, with 91 percent of institutions preferring them. The figure is up 100 basis points from 2018. Opportunistic investments were the second most popular, with 69 percent of institutions preferring them, though the figure has declined from 75 percent in 2018.

Sixty-six percent of institutions currently prefer core investments, up slightly from 63 percent the year before.

North America remains the most popular region for investment, preferred by 92 percent of institutions, up from 91 percent in 2018. That’s followed by continental Europe (73 percent), the U.K. (61 percent), Asia (40 percent), Australia (36 percent) and emerging markets (23 percent).

In addition, institutions based in Asia Pacific continue to view North America as their preferred investment market, with 90 percent of respondents picking it as the most popular region for them. That’s also true for institutions based in the Americas (90 percent). European investors, on the other hand, continue to prefer their domestic region at 98 percent.

Hodes Weill and Columbia University administered the survey between May and October 2019. The final results included the responses of 212 investors based in 24 country with total assets under management of $1.1 trillion.  

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