Despite the late cycle, high valuations and concerns over interest rates and geopolitical risks, global institutions still believe in the opportunities that investing in real estate presents, David R.Hodes, Managing Partner, Hodes Weill said in his keynote address to Real Asset Media’s European Outlook Briefing in New York last week.
Following a four-year downward trend, institutional conviction for real estate experienced an uptick last year, according to Hodes Weill’s 2018 Institutional Real Estate Allocations Monitor. The ‘conviction index’, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint increased from 4.9 to 5.1 .
The increase was surprising, Hodes said, given the level of concern about the late cycle and other issues, yet the conviction index increased consistently across all regions.
Hodes illustrated the main outcomes of the detailed global survey, which has been conducted for the past 6 years by Hodes Weill, and asks 40 questions to over 3,000 investing institutions around the world, who represent $12 trillion of institutional AUM.
‘We had all this great anecdotal information but nothing terribly scientific, so we decided to get a statistically significant response both in terms of the number of investors and the amount of capital they represent,’ he said.
The Monitor shows that conviction works in practice too, as allocations to real estate are set to rise.
Target allocations to real estate continued to climb in 2018, increasing to 10.4%, up 150 bps since 2013. However, there is a wide range: 30% of institutions increased their allocations substantially, 40% remained flat and 30% decreased them. Despite the increase in allocations, most institutions (60%) remain under-invested relative to target allocations
The forecast for 2019 is for institutions to increase their average target allocations by an additional 20 bps in the next twelve months, led by European, Asian and Middle Eastern institutions, while America will remain flat ‘because they are pretty fully invested’.
Cross-border capital flows remain strong, but interest is shifting away from the US towards Europe and Asia.
Institutional real estate holdings have been growing because of strong performance and an increase in investment activity, but institutions remain cautious. The main concerns are cyclical high valuations, geopolitical risks and rising interest rates.
‘There was a great deal of caution in the air about where we are in the cycle when the survey was done and this is probably even more true today,’ Hodes said. ‘People are not seeing dysfunction or imbalances, they just feel the good times have lasted a long time so it might be better to be on the defensive than the offensive.’
The current real estate environment is positive, but there is a sense that valuations are high and in a late cycle environment it is too much of a gamble to put capital at risk. They know that ‘cycles don’t end just because a bell rings after a certain number of months. There just is a sense in the US that this cycle is pretty long-dated. No one is expecting big calamities, but they’re just more concerned about the risk out there. There is a period of profound introspection going on.’
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