Investor Confidence in Real Estate and Changing Allocations to the Asset Class – October 2014

by Olivia Harmsworth

  • 07 Oct 2014
  • RE

The results of a recent Preqin investor attitudes study, Preqin Investor Outlook: Real Estate, H2 2014, show that the past 12 months have seen confidence in real estate increase among institutional investors, with 32% of respondents believing that returns have exceeded expectations over the past 12 months, compared to just 10% of investors which stated so in H2 2013. Correspondingly, the proportion of investors which stated that returns had fallen short of expectations has declined from 25% to 15% over the same timeframe.

North America-based institutions have the most positive outlook, with 58% of investors perceiving the asset class positively, compared to 44% of Asia-based investors and 14% of Europe-based investors. The vast majority (86%) of Europe-based investors view real estate in a neutral light, with none perceiving the asset class negatively. Although many European economies have experienced a slower recovery from the downturn than those in other regions, the more positive economic outlook and corresponding improvement in real estate fundamentals has led to a return of confidence among investors based in Europe.

As a result of both increasing confidence and the need for many institutional investors to further diversify their portfolios to generate the returns they need to meet their obligations, it is perhaps unsurprising that many investors are planning to increase their allocations, with 41% of institutions planning to increase their allocation to real estate over the longer term, compared to 31% of investors which stated so just six months ago. Europe- and Asia-based investors are the most likely to increase their real estate allocations, with 71% and 56% respectively stating that they plan to do so, compared to 26% of North America-based institutions.

The growing confidence among investors’ portfolios is further reflected in the amount of capital they plan to commit to the asset class in the next 12 months. The chart below shows that 55% of active institutions plan to invest $100mn or more to private real estate in the next 12 months, compared to 40% which stated so in H2 2013. 

As the performance of the real estate asset class has improved in recent years, investor confidence is returning and allocations to the asset class are likely to rise in the next few years. This is most likely to be the case among Europe- and Asia-based institutions. In particular, greater numbers of Asia-based investors are looking to invest internationally, with these institutions likely to be an important source of capital for managers raising Europe- or North America-focused funds. The fundraising market remains a challenging one, and while there is a large pool of institutional capital set to enter the asset class in the coming years, fund managers may need to cast the net wide to be successful in raising capital, and be prepared to target investors across the globe.

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