Global Institutions Increase Their Allocations to CRE

Uncertainties related to COVID-19 notwithstanding, global institutions remain bullish on commercial real estate. Investor sentiment increased for the third straight year, reaching a seven-year high in 2020, according to Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate’s eighth annual Institutional Real Estate Allocations Monitor. 

Institutions are also planning to expand their allocations toward real estate. Target allocations among survey respondents increased to 10.6% in 2020, up 10 basis points from 2019 and 170 basis points from 2013, when the survey was first conducted.
Hodes Weill says the 10-bp increase implies the potential for an additional $80 to $120 billion of capital allocations to commercial real estate over the coming years.

“While the impact of COVID-19 and geopolitical issues on commercial real estate remains a concern, institutions anticipate that a potential buying opportunity is emerging as distress and dislocation become more prevalent,” said Douglas Weill, managing partner at Hodes Weill.

He continued, “We expect that this, combined with rising sentiment in favor of the asset class, will lead to an increase in investment pacing. Moreover, liquidity is expected to increase, which should continue to support asset pricing, transaction volumes and cost of capital. All things considered, real estate continues to provide attractive returns relative to other asset classes in a market defined by prolonged uncertainty.”

Although the survey has found in recent years that institutions remained meaningfully under-invested relative to target allocations, this year’s results indicate that the gap is closing. Actual allocations increased meaningfully year-over-year from 9.4% to 10.0%, with institutions under-invested by an average 60 basis points. That compares to a 110-bp gap in 2019.

Since the survey was conducted in the months immediately following COVID-19, this may be in part attributed to the denominator effect, as public equities experienced a significant decline in value. However, Hodes Weill notes that as public equities have returned to levels at or near the prior peak, institutions have indicated that the margin between actual and target allocations has again widened.
 
When it comes to deploying capital, value-add strategies remain the strongest preference globally. Yet, Hodes Weill says investors are shifting their appetite to higher-return, opportunistic strategies to capitalize on anticipated dislocation resulting from the pandemic.

APAC investors have led the shift to opportunistic, with 73% of institutions from the region focused on opportunistic investments – up from 40% in 2019. Approximately 75% of Americas-based institutions and 62% of EMEA-based institutions are actively allocating to opportunistic strategies – compared to 65% and 51% in 2019, respectively.

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