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Institutional Investors Raise Their Targets for Real Estate Allocations

Institutional investors' target allocations to real estate averaged 10.1 percent this year, up from 9.9 percent in 2016, a new report finds.

A new report put together by Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, a global real estate advisory firm, found that institutional investors continue to increase their targets for real estate investments, in spite of facing some challenges.

Institutions’ target allocations to real estate averaged 10.1 percent this year, up from 9.9 percent in 2016, the report’s authors found. In 2018, target allocations will likely rise to 10.3 percent, survey respondents indicated. Thirty percent of survey participants increased their target allocations to real estate in 2017, while 18 percent decreased their allocations.


Most of the decreases could be attributed to the endowments and foundations space, perhaps due to the difficulty of achieving the necessary yields, which average 9.5 percent, the report’s authors speculate. Public pension plans have kept their target allocations largely flat with last year’s levels, while private pension plans, insurance companies and sovereign wealth funds have increased allocations. Public and private pensions and insurance companies target real estate returns of under 8.00 percent.


However, actual allocations have trailed set targets by about 100 basis points, with 60 percent of surveyed institutions reporting they were underinvested compared to targets. Last year, the figure was 50 percent.

Overall view of the opportunities present in the real estate sector has reached a five-year low in 2017, according to the survey’s “conviction index.” The index measures investors’ view of opportunities from a risk/return perspective on a one-to-10 scale. In this year’s survey, the index came in at 4.9. In 2016, it was at 5.4. The reasons include high competition for assets and the resulting outsized valuations, rising interest rates and geopolitical instability, according to the report’s authors.


Returns on institutional real estate investments have been slowly declining over the past few years. In 2016, the annual investment return averaged 8.6 percent, down 240 basis points from 2015.

The survey was administered between May and September of this year and included 244 institutional investors. Survey respondents included public pensions (34 percent), endowments (31 percent), private pensions (18 percent) and insurance companies (14 percent). Three percent of respondents included sovereign wealth funds and government-owned entities. Sixty-nine percent of respondents were based in the Americas, 10 in EMEA countries and 11 percent in Asia Pacific. The majority (82 percent), held less than $50 billion in assets.

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