U.S. institutional investors, such as pension funds, endowments, and foundations, plan to reduce their new capital commitments to real estate by an average of 19 percent in 2017.
An annual investor survey conducted by Institutional Real Estate, Inc. and Kingsley Associates — the 2017 Institutional Investors Real Estate Trends — reveals U.S. investors plan to commit $62 billion of new capital to real estate this year.
"The decline in new capital flows can be largely attributed to two primary factors," says Jim Woidat, a principal at Kingsley Associates. "U.S. 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."
While average new capital commitments to real estate are expected to decline relative to 2016 commitments, the wide majority of U.S. investors — 72 percent — still plan to be active with new commitments to real estate in 2017. Survey respondents ranked industrial assets as the most attractive property type for new investments, followed by multifamily assets.
"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, Inc. "U.S. investors dialed back their total return expectations for real estate from 8.7 percent last year to 7.4 percent for this year. However, on a risk-adjusted basis, respondents ranked real estate as the most attractive asset class for the seventh consecutive year."
The survey also revealed U.S. core properties and value-added properties would receive the majority of new real estate investment capital, 33 percent and 27 percent, respectively. U.S. investors also plan to allocate 20 percent of capital to opportunistic investments, and 8 percent of capital to debt products. Foreign investments are targeted for 7 percent of the capital, and 5 percent was earmarked for real estate securities.
This is the 21st year IREI and Kingsley have teamed up to conduct the survey. This year's study received the highest level of participation since the survey inception, with a total of 164 responses, comprising 113 U.S. investors and 51 foreign investors representing $7.9 trillion in total assets and $741 billion in real estate assets.