New research shows institutions are increasingly outsourcing property investments to external managers as global appetite for real estate, particularly Asian assets, continues to grow.
Some 70% of institutions outsource their entire real estate portfolio to third-party managers, a figure that has steadily risen year-on-year, according to an annual survey by property advisory firm Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate.
And only 4% of investors manage their whole real estate allocation in-house.
The study, published this week, covered 208 institutional investors in 29 countries with total assets under management of some $11 trillion and real estate holdings of about $1 trillion.
As might be expected, given the extra resources needed for in-house investing, a larger proportion of smaller institutions said they outsourced their investment portfolios (78%) than did larger institutions (35%).
Rising target allocations and growth in cross-border investing continue to drive up the percentage of investors that outsource their real estate portfolio management to third-party firms.
Global average target allocations to real estate increased to 10.4% in 2018, up 30 basis points from 2017 and up around 150bp since 2013, according to the Hodes Weill/Cornell report. And institutions worldwide are expected to raise their target allocations by another 20bp over the next 12 months, driven by forecast increases of 40bp both in Asia Pacific and in Europe, the Middle East and Africa (Emea).
Indeed, asset owners globally are, on average, still below their target allocations, particularly in Asia, where the shortfall is 120bp (9.4% actual versus a target of 10.6% - see figure 1 below).
That fits with the overall trend. Global investment in property rose by 18% year-on-year in 2017 to a new record high of $1.8 trillion, up from $1.5 trillion, according to property services firm Cushman & Wakefield.
That hefty rise in investment demand is perhaps not surprising given how real estate returns continue to outpace target returns by a “meaningful margin” over trailing one-, three- and five-year horizons, the Hodes Weill/Cornell research noted (see figure 2 below).
In addition, property portfolios, it said, posted an average gain of 9.2% in 2017, up from 8.7% the year before.
ASIAN PROPERTY IN FAVOUR
When it comes to geographic allocations, institutions in every region are indicating shifts in regional focus.
Three-quarters of institutions in Emea are focusing more on Asia Pacific real estate, up from 59% in 2017, the Hodes Weill/Cornell research showed. In addition, investors in the Asia-Pacific region have shifted their priorities from North America to their home markets. This fits with the experiences of asset managers that AsianInvestor has spoken to.
Moreover, investors surveyed in the Americas indicated an eight percentage point increase in focus on non-domestic investment strategies.
The research highlighted various reasons for such trends. Anecdotally, investors in Emea and in Apac say it has become increasingly difficult to find attractive opportunities in the US. Increased competition for core property assets in North America has driven up values and forced institutions to pursue core opportunities in secondary markets. These obstacles have only been exacerbated by the strength of the US dollar and the historically high cost of currency hedging.
Canadian pensions are among those investors looking to boost or start building their Asian property exposure. Healthcare of Ontario Pension Plan and Ontario Teachers' Pension Plan do not have any real estate in the region as yet, but that is likely to change in future.
And at least one mid-sized Canadian retirement fund is looking to make its first allocation to a pan-Asian open-ended real estate strategy, both Michael Peck, Canada head of institutional business at fund house Invesco, and the Asia head of business development at a big US private equity firm, have told AsianInvestor.
That said, the bigger Canadian funds, such as Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec, do most of their property investing on a direct basis.