Institutional investors plan to invest at least €55.4 billion in global real estate this year, nearly half of it (€26.5 billion) in Europe, according to INREV.
Together with the €9.2 billion that funds of funds also intend to invest, there is €64.6 billion of institutional money targeting the sector.
The 2021 Investment Intentions survey, published jointly with ANREV and PREA (Pension Real Estate Association), also reveals that investors have allocated €17.5 billion for investment in North America and €9.7 billion for Asia Pacific. The remaining €1.7 billion is heading for the Americas outside the US, and Africa.
INREV said diversification benefits of real estate in a multi-asset portfolio as one of the most frequently cited factors attracting investors to property, whereas inflation hedging was the least important factor.
About 80% of respondents said the turbulence attributable to the COVID-19 pandemic would not alter their investment plans. Moreover, North American investors looking to invest in Europe have marginally increased their allocation which INREV said is perhaps because they sense the chance to enhance returns on the back of pandemic-induced opportunities in niche sectors and markets.
Average current real estate allocations globally stand at 9.3% versus an average target of 10.0%, which INREV said suggests that institutional capital should continue to flow into the asset class.
Europe-domiciled investors up allocation to region
For European investors, the gap between average actual and target allocations was the narrowest at 9.0% and 9.3%. Investors based in Asia Pacific had widest spread between actual allocations of 8.0% and target allocations of 9.7%.
About 46% of investors domiciled in Europe expect allocations to real estate to increase over the next two years while only 8% expects a decrease.
Most investors selected non-listed real estate funds and private REITs as their preferred route to market when deploying new investment capital in the European region. The second most preferred route, based on an expected increase in allocations, are joint ventures and club deals. Investors also expect to increase allocation to non-listed real estate debt. In 2021 it ranked third on a weighted real estate AUM basis, up from fifth place in 2020.
Core still dominates as the preferred investment style globally. It accounts for around 83% of the average institutional investment portfolio while value added and opportunistic strategies represent 11% and 6%, respectively.
“Real estate’s role in a multi-asset portfolio is the key determinant to invest in the asset class.”
Investors domiciled in North America have the greatest risk appetite, with 14% of their portfolios made up of value added and 12% of opportunistic investments. However, three quarters of their portfolios are still focused on core investments.
There has been a notable shift to a risk-off approach for investment targeting Europe. Half of all respondents opted for core strategies which is the highest level since 2015. The Preference for opportunistic strategies fell from 20% last year to 13% in 2021. Those preferring a value added approach declined from 43% to 37%.
There is significant home bias in all regions. European investors have two thirds of their portfolios in their own region. In 2021 European investors are expected to invest 62% of new capital within the region and in Asia Pacific the allocation is higher at 69% while allocating 22% to North America and 9% for Europe.
North American investors allocate 73% to their home market and the remainder is split almost equally between Asia Pacific and Europe.
Within Europe Germany and France remain favoured destinations for the next two years. Germany remains the most preferred country in Europe among investors, while France overtook the UK and is now in a comfortable second place. The UK, which was the top-ranked destination in 2017 and 2018 and second in 2019 and 2020, slid into third position this year.
Investors from Asia Pacific and Europe are particularly interested in Germany and France, while their counterparts from North America show a strong preference for the UK.
INREV said North American investors typically have a higher appetite for risk and currently the UK offers more ways to enhance returns with distressed or repositioning opportunities.
Globally, offices command the largest allocations from investors (34%), followed by residential (23%), retail (20%) and industrial/logistics (12%). Niche sectors account for 11% of allocations across global portfolios.
Unsurprisingly, retail’s fall from favour continues. Residential shows significant gains becoming the joint first sector preference for investors and 100% of funds of funds prefer to invest in the residential sector.
Covid and Brexit mean UK loses top-10 slot
One marked shift in attitude toward combined country and sector preferences is the absence of the UK from the top 10, most probably due to the on-going uncertainty caused by the dual impact of the COVID-19 pandemic and Brexit, INREV said.
Investors have a strong preference for Germany industrial/logistics, Germany office, France office and France industrial/logistics. Investors also have a considerable appetite for Germany residential and France residential.
So far as city and sector combinations are concerned, apart from Paris offices the top four preferred slots include industrial/logistics in Berlin, Paris and London, exemplifying the increased appetite for the sector. Despite strong appetite for residential assets, only Paris residential made it into the top 10 list of investor preferences, while the sector was featured three times in the country and sector combinations.
“This year’s Investment Intentions suggests continuing robust investor appetite for real estate, with Europe and the diversity it offers firmly in sight and somewhat of a sweet spot for both local, regional and cross-regional capital. Real estate’s role in a multi-asset portfolio is the key determinant to invest in the asset class,” said INREV’s director of research and market information Iryna Pylypchuk. “With target allocations maintained or even increased in some cases, there is clearly room for more capital to find its way into the asset class.”