More than half of global investors plan to increase their real estate allocations within multi-asset portfolios, according to new research.
Yields are likely to compress further with 52% of respondents to the Global Investor Outlook (GIO) for 2016 survey from Colliers International saying they would move more money into real estate next year.
The global property company says that combined with relatively low levels of debt compared with the previous market peaks, this flood of capital would further cement a long term climate of stability for global real estate returns.
The GIO for 2016 found that despite a reduced appetite for risk, debt would play a greater role in the market next year as investors seek to boost cash-on-cash returns.
Colliers estimates that up to US$400 billion of institutional funding could begin chasing global real estate to diversify and stop an ongoing bleed of cash driven by the underperformance of traditional fixed income investments.
It points out that last month, Japan’s Government Pension Investment Fund posted huge losses and announced a move into commercial real estate for the first time with an estimated US$65 billion of firepower. Chinese insurance companies have already snapped up a swathe of billion dollar assets and could have in excess of US$70 billion to spend.
The firm also says that as such investors demand high value assets so they can deploy large amounts of capital in one go, big cities such as London and New York have become hot markets with yields crunching well below 4% on prime office buildings.
The survey found that 75% of UK based investors would use debt compared with 65% in 2013. Similarly, 87% of US investors would use debt, up from 63% in 2013.
It also points out that real estate capital has never been more mobile. At around US$250 billion, global cross border investment accounted for 40% of total direct volumes in the first nine months of 2015. This compares with 33% last year, and 37% at the peak of the previous cycle in 2007.
Price rises and subsequent yield compression across prime property markets mean that taking on more debt is a more prevalent way to achieve some of the lofty returns targets investors have set, the report adds.
‘In real estate, the days of pass the parcel are over and long term secure investment in core markets will be the norm. It may be that short term cyclical players will need to focus on assets that are secondary by quality and/or location,’ said Tony Horrell, chief executive for the UK and Ireland at Colliers International.
According to Richard Divall, head of cross border capital markets at Colliers International, the globalisation of capital markets is now firmly in motion with many crossing borders for the first time.
‘Multi-asset investors, buoyed by poor income performance in core assets, have woken up to commercial real estate. More are expanding their allocations to the sector and a real estate holding of up to 20% could soon become commonplace for global pension funds,’ he said.
‘An ageing population is maintaining the pressure on institutional pension and insurance funds to achieve yields that match long term liabilities. With better regulated debt markets and new macro-prudential tools, we see core property assets, globally, being stripped away from the broader real estate market to become more aligned to bond like financial instrument,’ he added.
Madeleine McDougall, head of institutional clients at Lloyds Bank Commercial Real Estate and chairman of CREFC Europe, pointed out that there has been a fundamental reshaping of property debt over the last five years and what has emerged is a more stable environment and a greater number of participants sharing risk.
‘Increased appetite for real estate is understandable given its historic outperformance of other asset types. Debt will continue to play a crucial role over the next few years, particularly in the financing of new developments which has fallen behind demand,’ she explained.
‘Debt plays a vital role in supporting what is one of the key drivers of economic growth and regulators should seek to strike a balance between encouraging responsibility and not hampering positive performance,’ she added.
Institutional investors from China and across Asia are increasingly mobile, according to Collin Lau, founder at BEI Capital and former head of global real estate at China Investment Corporation.
‘When it comes to top tier locations, however, they are caught in a dilemma between the desire to diversify globally and the apparently fully priced market conditions. Perhaps the solution lies with their ability to deal with operational complexities and seek improvements in yields consistently by value added approaches,’ he said.
Peter Cosmetatos, chief executive officer of the Commercial Real Estate Finance Council Europe, said that after two years of a borrowers’ market, a new equilibrium has emerged since the summer, with margins stabilising or even ticking up.
‘While this relative equilibrium in the major investment markets could persist for some time, it could be rocked by interest rates taking an unexpected turn or by geopolitical events. The survey suggests that the biggest current areas for concern are around macro and geopolitical risks, rather than either the occupier market or a return to reckless lending,’ he added.