Real estate appeals to investors’ risk and return objectives in the current economic environment, finds Andrew Holt
Almost three quarters of institutional investors – 72% – are looking to increase their real estate investments over the next five years, according to a survey of 222 asset owners.
Breaking this down, a total of 16% intend to expand their real estate portfolios by more than 10% over the next five years, while 56% target 10% growth. At the same time, 28% expect to keep their weighting in real estate constant, with no investor intending to quit the asset class.
This highlights some appealing factors of the asset class: the growing attraction of real estate in the current economic environment of low interest rates and fixed income yields, but also that such assets can offer institutional investors a range of opportunities that meet a number of risk and return objectives.
The survey also shows that during the Covid-19 pandemic, real estate proved to be a stable investment, with 56% of investors reporting no adjustment to their real estate portfolios.
Overall, these investments proved to be remarkably resilient during the pandemic and delivered solid returns, according to the authors of the report.
The trend towards broader diversification is reflected in how investors plan to adjust their portfolios over the next five years.
About every second respondent plans to grow their infrastructure exposure and 42% want to invest in new asset classes, while 43% will diversify their portfolios further across different real estate segments, investment strategies (12%) or international markets (12%).
Regulation, risk & reporting
In addition, the survey revealed that faced with growing regulatory requirements and an increasing importance of risk reporting, 79% of investors see digital services as an important differentiator for real estate investment managers in the future.
As a result, 97% expect regulatory requirements for reporting to increase over the next five years, with 92% believing risk reporting will become more comprehensive.
The growing requirements were cited as being higher expectations for reporting by segments (40%), market benchmarking (42%), performance (48%) and investment reporting (60%).
Furthermore, and unsurprisingly, a significant majority are preparing for increased ESG reporting at a portfolio and individual property level – 87% and 77% respectively.
As a result, 73% plan to increase ESG related figures and indicators used for their portfolio analyses and reporting.
Faced with the growing requirements, institutional investors believe developments towards automated portfolio analysis and reporting will accelerate with 94% expecting automated reporting to become more important, 34% stating its importance will increase strongly and 84% believing automated analyses at portfolio level will become more important.
At the same time, investors are less decisive about the application of artificial intelligence (AI) in portfolio analysis, with 55% saying that the use of AI will increase in the next five years, but only 7% believe in a strong increase.