Institutional investors are looking to commit $62 billion in new capital to commercial real estate investments in 2017, according to a survey by Kingsley Associates and Institutional Real Estate. This is an average reduction of 19% to their investments in this asset category compared to 2016.
“The decline in new capital flows can be largely attributed to two primary factors,” according to Jim Woidat, a principal at Kingsley Associates. “US survey respondents reported real estate holdings exceeding their target allocations to real estate, which reduces the need for new capital commitments. In addition, investors report a significant uncalled capital overhang of $47 billion, which also limits the need for new capital deployment.”
Most US investors however—72%–are still actively looking for new real estate investments in 2017. They are most interested in industrial properties, as a result of demand from the growth of e-commerce, with multifamily coming in second. Third on their list is the self-storage property type, followed by senior housing and student housing, while they are less enthusiastic about office, medical office and retail properties.
They also expect to deploy the most amounts of new real estate investment capital into “core properties”, at 33%, and “value-added properties”, at 27%. And they are slating 20% of the capital to opportunistic investments, 8% to debt products, 7% to foreign investments, and 5% to real estate securities.
Geographically, the US remains the number one draw for both US and foreign real-estate investors. US investors saw the most drop off in interest for the United Kingdom and Northern Europe, as a result of concerns about Brexit and the overall stability of the European Union. And both US and foreign investors view Russia as the least-attractive region for new investments, based on geopolitical concerns.
“Real estate investors have enjoyed healthy returns post-global financial crisis, but it’s evident from the survey that they are showing more caution at this point in the cycle,” notes Geoffrey Dohrmann, president and CEO of Institutional Real Estate. “US investors dialed back their total return expectations for real estate from 8.7% last year to 7.4% for this year. However, on a risk-adjusted basis, respondents ranked real estate as the most-attractive asset class for the seventh consecutive year.”
About half of the US investors, at 49%, reported that real estate had exceeded their expectations for 2016, the best performance of all asset classes, which explains their continued interest in this asset category.
Respondents to the IREI survey include 113 US institutional investors and 51 foreign investors, representing a total of $741 billion in real estate assets.