Despite COVID-19, Global Institutions Continue to Increase Allocations to Real Estate, Finds Hodes Weill & Associates and Cornell University | Business
NEW YORK – (BUSINESS WIRE) – December 10, 2020–
Uncertainties related to COVID-19 have not dampened global institutions’ confidence in commercial real estate. According to Hodes Weill & Associates and Cornell University’s Baker program in Real Estate’s eighth annual Institutional Real Estate Allocations Monitor, investor sentiment rose for the third year in a row, hitting a seven-year high in 2020.
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The “Conviction Index” in this year’s survey, which measures the institutes’ view of real estate as an investment opportunity from a risk-return perspective, rose from 5.7 to 5.9. The steady growth in confidence in the asset class reflects the strong returns that investors have achieved over the past five years, which have been particularly attractive in a low-return environment. Although actual investment returns fell 30 basis points to 8.5% in 2019, results continued to exceed the target average returns of 8.3%.
The full report, released today, can be downloaded from www.hodesweill.com/research.
Real estate continues to play an important and growing role in institutional portfolios. In addition to the favorable investment performance since the global financial crisis, the institutes cite the following reasons for increasing their target allocations: low correlation between investment returns and other asset allocations; favorable operational fundamentals for supply and demand; and the opportunity to generate attractive income returns. Target allocations increased to 10.6% in 2020, an increase of 10 basis points from 2019 and 170 basis points from 2013 when the survey was first conducted. The 10 basis point increase implies the potential for additional capital allocations of $ 80 billion to $ 120 billion 1 for commercial real estate in the coming years, which should support continued liquidity and asset valuation.
Douglas Weill, Managing Partner at Hodes Weill & Associates, said: “While the effects of COVID-19 and geopolitical issues on commercial real estate remain a matter of concern, the institutes believe that as hardship and upheaval spread, there will be a potential Buying opportunity results. We assume that this, combined with the rising sentiment in favor of the asset class, will lead to an increase in investment speed. In addition, liquidity is expected to increase, which should continue to support asset pricing, transaction volume and cost of capital. All in all, real estate continues to offer attractive returns compared to other asset classes in a market characterized by persistent uncertainty. “
While the survey in recent years showed that institutions are still significantly underinvested in relation to target allocations, this year’s results suggest that the gap is closing. The actual allocations rose significantly year-on-year from 9.4% to 10.0%, with the institutes being underinvested by an average of 60 basis points – a significant decrease compared to the 110 basis points in 2019. The survey was carried out in the months immediately following COVID- 19 this can be attributed in part to the denominator effect, as public stocks saw a significant drop in value. However, as public stocks have returned to levels close to or close to their previous highs, the institutions have indicated that the spread between actual and target allocations has widened again.
When it comes to using capital, value creation strategies remain the strongest preference for institutions worldwide. However, investors are shifting their appetites to higher-yielding opportunistic strategies to capitalize on the expected upheavals resulting from the COVID-19 pandemic. APAC investors have initiated the switch to opportunistic. 73% of institutions in the region were focused on opportunistic investments – up from 40% in 2019. Approximately 75% of America-based institutions and 62% of EMEA-based institutions actively invest in opportunistic strategies – compared with 65% and 51, respectively % in 2019.
While cross-border capital flows remain strong, the proportion of institutions investing outside of their home region has decreased for the third year in a row. This trend is led by APAC institutions, whose willingness to assign strategies outside of their home region decreased by 10%. North America remains the largest recipient of global capital allocations due to the region’s liquidity and relative stability, followed by continental Europe.
In discussing real estate options, an America-based insurance company said, “The market is divided between the” belongings “. Industrial, data center, and life science sectors are experiencing strong demand for debt and equity and are likely to benefit from a compression of the cap rate. Hotel, retail and office will continue to face liquidity issues until we go through COVID and the economy recovers. “
Closed-end funds remain with global institutions, with 82% actively raising capital for funds. However, allocations to closed-end funds remain 11% below their 2018 high. Open-ended private funds saw allocations rise 4%, with 55% of institutions targeting these investment products. While larger institutions continue to shift their allocations to direct investments, separate accounts and joint ventures, 91% of institutions indicate an interest in allocating to private funds – especially for opportunistic and specialized strategies. However, smaller institutions still prefer closed and open funds over other types of investment vehicles.
Institutions outsource approximately 85 percent of their new asset assignments to third party managers, resulting in sustained double-digit percentage growth in assets under management for the investment and fund management industry. They continue to prefer allocating capital to existing managerial relationships, with 62% of investments in 2020 going to groups with which institutions have already established relationships. Conversely, the willingness to invest among aspiring managers remains low among all respondents at 12%, which is due to a strong preference for established managers in times of uncertainty.
As capital allocation continues to target larger managers, boutique and mid-cap managers are increasingly pursuing strategic transactions to align with larger global platforms that provide operational support as well as access to global institutional client relationships. As reported in Hodes Weill’s mid-2020 M&A market report, 11 manager transactions were announced in the first half of 2020 – slightly ahead of the pace in 2019 when 19 transactions were reported for the full year. In addition to controlling sales, the industry has seen an increase in minority sale transactions.
With regard to ESG considerations, 47% of institutions state that they have a formal ESG policy. This is an increase of 14% since Hodes Weill started surveying institutions on ESG in 2015. Notably, 63% of institutes in the EMEA region indicated that their investment decisions are influenced by ESG policies. American institutes have lagged behind their competitors in the industry. Only 22% of the institutes state that the ESG influences their investment activity.
The 212 institutes that participated in this year’s survey represent total AUM of $ 12.6 trillion and portfolio investments in real estate totaling around $ 1.3 trillion.
About Hodes Weill & Associates:
Hodes Weill & Associates is a leading global consultancy focused on the real estate investment and fund management industries. * The company has offices in New York, Denver, Hong Kong and London. Founded in 2009, Hodes Weill provides institutional fundraising for funds, transactions, co-investments and separate accounts. M&A, strategy and restructuring advice; as well as fairness and evaluation analysis. Customers include investment and fund managers, institutional investors, lenders, property owners and other participants in the institutional real estate market. For more information, please contact or visit www.hodesweill.com
* All US regulated capital markets and securities advisory services are provided by Hodes Weill Securities, LLC, a SEC registered broker-dealer and member of FINRA and SIPC, and internationally by non-US Hodes Weill subsidiaries.
Via Cornell University’s Baker Program in Real Estate
Cornell’s Baker Real Estate Program includes the Master of Professional Studies in Real Estate, a comprehensive graduate curriculum that trains the next generation of real estate executives. Cornell is also home to the Cornell Real Estate Council, an extensive network of over 2,000 leading real estate companies, and hosts the annual Cornell Real Estate Conference. For more information, see https://baker.realestate.cornell.edu/.
Disclaimer of liability
For informational purposes only. This is not a solicitation to buy or sell any securities or securities products. Please see the full report for important disclaimers. The full report can be found at www.hodesweill.com/research
1 Based on Hodes Weill’s estimate of ± $ 100 trillion in global AUM based on various papers, research reports, and publications.
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ICR on behalf of Hodes Weill
Jason Chudoba, 646-277-1249 | [email protected]
Megan Kivlehan, 646-677-1807 | [email protected]
KEYWORD: UNITED STATES NORTH AMERICA NEW YORK
KEYWORD IN INDUSTRY: OTHER CONSTRUCTION AND REAL ESTATE BUILDINGS AND REAL ESTATE COMMERCIAL AND REAL ESTATE AND REAL ESTATE URBAN PLANNING REIT
SOURCE: Hodes Weill & Associates
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PUB: 12/10/2020 8:00 a.m. / DISC: 12/10/2020 8:01 a.m.