INREV: Diversification benefits of real estate top priority in all markets except Germany

Diversification benefits within a multi-asset portfolio is the most dominant reason for investment in real estate, according to INREV’s Investor Universe Study, followed by return enhancement.

This reflects that uncorrelated assets are highly prized and real estate has a long track record of delivering a slightly different pattern of returns to other asset types, says INREV. Diversification benefits were considered the most important reason for investing in real estate in each of the countries covered, with the exception of Germany. Here diversification was rated marginally less important than income return and return enhancement.

A number of German investors see return enhancement as a consequence of real estate’s dependence on land as a significant value driver, which INREV says implied that long-term trends in population growth, urbanisation and productivity growth have resulted in above average returns for real estate investors.

The emphasis on income return was also shared by UK investors, where many defined benefit pension schemes are maturing and there is a growing need to meet pension obligations from assets’ cash flows. The income-generating character of real estate has proven especially welcome in an era of low interest rates, during which it has maintained a yield differential over bonds.

For the surveyed investors as a whole, risk-adjusted performance relative to other asset types was judged to be slightly more important than income return. Risk-adjusted performance came second to diversification in both Sweden and Italy, while income return was ranked second in Finland and France.

Real estate’s inflation hedging properties were seen as the least important of the five proposed reasons for allocating to the asset class, right across the European sample of investors and in every country except Sweden, where income return was viewed as least important.

In its Investor Universe Study, INREV wrote:

“The investors overwhelmingly favour core assets in their real estate allocations, suggesting a relatively risk averse approach to the asset class. Across Europe as a whole, the investors have 84.9% of their real estate AUM in core holdings. French investors have the highest allocation to core real estate, 93.9%, and here the insurance investors who dominate the sample value the perceived stability and relative predictability of core real estate. Meanwhile, Swedish, Finnish and Italian investors have the lowest core allocations at just over 70%.”

Value added assets account for most of the non-core real estate investments across the sample, with the exception of the Netherlands, where opportunity holdings account for 13.1% of the allocation, significantly higher than elsewhere in Europe. At least in part, this may reflect Dutch investors’ higher allocations to non-domestic real estate than for investors from other countries. Finnish investors also indicated that they would be more likely to adopt value add and opportunity strategies when investing abroad.

Perhaps surprisingly, investors from different countries in the study show substantial variations in the balance of the real estate sectors to which they allocate, although this may partly reflect the types of institutional grade investment stock available in their home market. Overall, real estate investors in general are increasingly international in their outlook.

james.wallace@realassetmedia.com