The flow of capital into real estate has been picking up momentum, driven by a variety of sources. At the beginning of the year, Cornell’s Baker Program in Real Estate and Hodes Weill released the results of a study they had conducted entitled the “2013 Institutional Real Estate Allocations Monitor.” Its focus is on the trends of allocation of capital into real estate. Combining the conclusions of that report with updated data from the first two quarters of 2014, we highlight some noteworthy trends in capital flow.
Let’s examine a couple of the study’s key conclusions in today’s context:
- Institutions are significantly under-invested in real estate, which is resulting in greater capital flows into the sector.
- Institutional allocations to real estate are increasing, indicating that the pace of annual investments will likely continue to accelerate well beyond 2014.
It has been well publicized that capital is currently flowing into real estate as the global financial crisis begins to be talked about more and more in the past tense. It is welcome news that capital will continue to flow into the sector for the coming years. This is being driven largely by two components: (1) being short of current target allocations and (2) the aim to raise those allocation targets further.
The report mentions that nearly 40% of institutions are below their portfolio allocation targets for real estate by more than 100 bps. (Industry estimates of institutional AUM are $60 – $80 trillion.) In fact, we can add more fuel to the fire by comparing the distribution of real estate investors’ current target portfolio allocations to the distribution of their actual allocations in Q1 2014. No surprise on the punch line: allocations are still below targets. Moreover, investors are expected to increase their targets by over 50 bps on average.
One sub-set of investors to note is the institutions with less than $50 billion in AUM, whose current under-allocations are 104 bps on average. Investors with $5-$10 billion in AUM (100 bps below target) and those with less than $1 billion (-125 bps) are the most under-allocated within that group. Therefore, while the report indicates capital’s continued and accelerated flow into real estate, it can be expected that there will be various sources of this capital (as opposed to just a few mega-investors topping up their allocations).
Technology now available will aid these investors in their efforts to boost their real estate investments while allowing them to be thoughtful, conduct thorough due diligence, and manage risk.
Check back with us soon as we delve into some of the report’s other conclusions that we found worthy of discussion at this point.
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