€52.6 bln expected to be invested in global real estate despite continuing global economic and geopolitical uncertainty : INREV
According to the global Investment Intentions Survey 2017, published by INREV, ANREV and PREA, a minimum of €52.6 billion of capital is expected to be invested in global real estate during 2017. This represents a total average target allocation of 11.5% for investors – a gain of 1.5% from current allocations.
These results underline a continuing strong appetite for real estate among institutional investors, despite continuing global economic and geopolitical uncertainty.
Overall, more than half of investors who responded to the survey plan to increase their global real estate allocations over the next two years. The greatest uplift was suggested by European investors – up from 9.4% currently to 11.5%. Investors from Asia Pacific are not far behind with intentions of increasing their target allocations to real estate from 8.4% to 10.4%; while North American investors are mostly on target with the aim of growing their real estate allocation by 80 bps from 11.3% to 12.1%.
However, more detailed analysis reveals significant discrepancies between large and small investors on a weighted basis. While all investors plan to increase their allocations to real estate, larger investors will still maintain a lower allocation to this asset class as a proportion of total assets under management, than their smaller peers. North American investors expect to increase their allocation to real estate by 80 bps, compared to 200 bps and 210 bps for Asia Pacific and European investors, respectively.
Around half of the expected investment capital (49%) will come from European investors, with 36.3% from North American investors and 13.8% from investors from the Asia Pacific region. Interestingly, however, the US is expected to attract the largest percentage of total capital earmarked for investment at 40.9%; while 36.4% is predicted to be heading to Europe and 18.0% to Asia Pacific. The Americas (ex US) will attract a small but growing 4.8% share of the total capital. This picture suggests that, in general, investors will be adopting a more diversified global investment strategy than previously.
Winners and losers in Europe
The survey reveals a shift in investor sentiment relating to specific European markets. Germany, which was last year’s most preferred European market, has been replaced by France and the UK as the joint top pick for real estate investment in 2017 – both of which were selected by 74.1% of investors. The Netherlands is fourth, maintaining the position it attained last year, with Spain in fifth place – jumping up from ninth in 2016.
This picture is broadly echoed by fund of funds managers and fund managers, though France and Germany were both identified as the top targets for investment by 100% of fund of funds managers.
The majority of investors identified Germany office (56.9%), France office (55.2%) and Germany retail (51.7%) as their likely top three choices for real estate allocation in 2017. Preference for Germany is concentrated in office and retail whereas for UK and France, preference is spread across a wide range of sectors.
So far as city and sector preferences are concerned, all respondents indicated a move away from the once safe-haven of London office, which has fallen from the number one preference last year to fourth place (at 48%) in the current survey. This suggests post-Brexit caution. All respondents highlighted Berlin office as their primary city / sector preference (48.9%) for 2017, followed by Paris office (48.3%) and Frankfurt office (46.0%).
Risk and style
Nearly half of investors selected value added (48.7%) above core (40.8%) as their preferred investment style for the second consecutive year, reflecting a steady shift toward a greater appetite for risk. Opportunity came in at a relatively low (10.5%) third place.
In a reversal of sentiment from last year, the majority of investors identified non-listed real estate funds as the best route to market with 42.3% expecting to increase their allocations to these vehicles. Joint ventures and club deals, which were seen as the most desirable option in 2016, came in second with 38.8% of investors picking them this time. Separate accounts – last year’s fourth preferred vehicle type – are in third place for 2017 swapping places with direct real estate at 38.8% and 23.1%, respectively.
However, on a weighted basis, the survey reveals that larger investors still tend to favour joint ventures and club deals, separate accounts and direct investment.
Diversification and access to expert management remain the key drivers for investors to invest in non-listed real estate funds. But in the present environment, investors continue to see challenges for fund managers – particularly the availability of suitable product and the ability to deliver target returns.
‘The rise in capital allocation to real estate investment suggests a robust story for the coming year,’ said Henri Vuong, INREV’s Director of Research and Market Information. ‘There were obvious questions and concerns raised about certain markets that have historically been seen as bomb-proof, but this simply reflects the healthy ebb and flow in sentiment that comes with sophisticated investment decision making. Time will tell, but the survey points to a positive prognosis for the real estate investment industry, with non-listed funds driving access for many investors.’