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BNY Mellon: Institutional investors to increase RE allocations

But the asset class is most likely to see a reduction among the minority of investors planning to decrease their allocations to alternatives.

Institutional investors remain largely bullish on real estate, with about a third of those surveyed by BNY Mellon planning to increase their real estate allocations in the next year.

In a Tuesday report on investments in alternative assets, the New York-based banking and financial services firm said that private equity accounts for the largest share of institutional investors’ alternative assets allocations, while real estate comprises about 24 percent of allocations. Overall, alternative investments have performed well: 93 percent of investors said their alternative investment returns, which also include hedge funds and infrastructure, met or exceeded their expectations, and 86 percent said the same about real estate.

However, the report noted that although only a low number of institutional investors expected to decrease their allocations to alternatives, real estate is the asset class most likely to be singled out for reduction among such investors, with 10 percent of survey respondents saying they will allocate less to real estate in the next year, which BNY Mellon attributed to concerns about the real estate cycle turning, particularly in China.

The report also found that alternative investors across asset classes have a local bias, with the majority of investors preferring to increase their exposure to home markets – a potentially problematic strategy.

“While the local bias to which our survey points has long been a feature of institutions’ alternatives investment strategy, there is a risk that investors are not casting the net widely enough in their allocations,” BNY Mellon said in the report. “It is possible institutional investors based in Europe, the Middle East, Africa and the Americas are missing out on some compelling growth opportunities.”

These growth opportunities include urbanization and an overall increase in most developing countries’ populations, and in particular the rise of the global middle class.

“The longer-term picture for emerging markets’ alternative assets is underpinned by strong fundamentals,” the report said.