Analysis from McKinsey & Company suggests that real estate continues to yield high returns, noting that it’s useful for diversification and can acts as a hedge against inflation. However, many investors see it as a high-risk play, particularly in developing countries.
To get a better understanding of hard-to-gauge markets, McKinsey looked at the returns from more than 10,000 real estate investments across asset classes in 14 major cities over 19 years through 2012. The study found that real estate returns tended to be inversely correlated with those of conventional assets and thereby serve as a good diversification play for the portfolios of most institutional investors.
The study highlights two interesting trends characterising institutional investment in real estate. Firstly, the momentum toward non-traditional asset classes, such as student housing, data centres, healthcare offices, medical facilities, and assisted-living communities. And secondly, that investors are beginning to develop small teams of specialised investment practitioners, which could allow them to expand the sources of value creation to include operational improvements of assets.
According to results of another survey administered by Cornell University’s Baker Program in Real Estate and real estate advisory Hodes Weill & Associates, institutional investors plan to dedicate more of their funds to real estate, continuing a trend that has been seen since 2013. Global institutional investors’ average weighted target allocation to real estate is expected to pick up in 2019 to 10.6% from 10.4% in 2018.
Similarly, data from the global Investment Intentions Survey 2018, published by INREV, ANREV and PREA, also suggests continued positive sentiment toward real estate in general and non-listed real estate in particular.
The survey found that regionally, investors from Europe are expected to make the most significant allocations to real estate, accounting for 57.7% of total investment capital in 2018. North American investors will likely commit 25.2%, while those from Asia Pacific are forecasting 17.1%. Europe is also the regional destination of choice likely to attract an anticipated 41.2% of allocated capital, followed by the Americas (35.2%) and Asia Pacific (17.4%).
Not only are investors diversifying their real estate allocation across market geographies, but also different types of institutional investors are beginning to understand the
diversification benefits of investing in real estate.
While one of the most common types of investments is a REIT, or real estate investment trust, financial institutions and insurance institutions also purchase real estate as part of a wealth management platform and to manage their liabilities far into the future. Private equity groups also invest in real estate as a wealth fund to gain additional profits while real estate remains a principal component of most pension fund portfolios.
Several sectors that are having a real influence on real estate development are the hospitality sector and private real estate According to JLL, institutional investor’s appetite for the hotel and hospitality sector is gaining momentum, driven by the increasing volume of capital targeting real estate overall, and the potential for stable, high-yielding returns.
The private real estate industry is also evolving rapidly across many fronts, as substantial capital continues to enter the asset class from institutional investors globally. According to Preqin, over US$ 525 billion (AED 1.9 billion) has been invested in private real estate over the past five years.
Similarly, Deloitte’s 2019 Commercial Real Estate Outlook report also highlights the buoyancy of the commercial real estate industry as it is being redefined by business innovations such as flexible leasing, extensive use of technology, and changing tenant and investor expectations.