Despite COVID-19, Global Institutions Continue to Increase Allocations to Real Estate
Uncertainties related to COVID-19 have not dampened global institutions’ confidence in commercial real estate. In fact, 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.
The “Conviction Index” in this year’s survey, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.7 to 5.9. The steady growth in confidence in the asset class reflects the strong returns investors have realized over the last five years, which were particularly attractive in a yield-starved environment. Though actual investment returns declined 30 basis points to 8.5% in 2019, results continue to outpace average target returns of 8.3%. Real estate continues to play an important and growing role in institutional portfolios. In addition to favorable investment performance since the global financial crisis, institutions cite the following as reasons for increasing their target allocations: low correlation of investment returns to other asset allocations; favorable operating fundamentals in terms of supply and demand; and the opportunity to generate attractive income yields. Target allocations increased to 10.6% in 2020, up 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 an additional $80 to $120 billion 1 of capital allocations to commercial real estate over the coming years, which should support continued liquidity and asset valuations.
Douglas Weill, Managing Partner at Hodes Weill & Associates, said, “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. 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.”
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