Institutional investors plan to increase RE allocation

A report from PricewaterhouseCoopers describes an increased LP appetite for real estate, particularly in Asia, but also warns that one-fifth of investors are looking to decrease their exposure to the asset class amid a shrunken asset base.

More than 40 percent of institutional investors plan to increase their allocations to real estate in the next few years, above that of any other asset class, according to survey from PricewaterhouseCoopers.
Despite poor returns from the industry in 2007, the PwC survey revealed that 41 percent of investors are preparing to boost their exposure to real estate over the next three years, compared to 40 percent to private equity, 35 percent to infrastructure and commodities and 33 percent to hedge funds.

John Forbes, UK real estate leader at PwC, said investors are particularly looking to the emerging markets of Asia, where demographics were helping to drive the market.

US pension funds have been keen to diversify their portfolios by expanding their exposure to real estate and private equity. Just last week Arizona’s Public Safety Personnel Retirement System told it planned to double its investments in real estate to six percent from its current three percent level.

However, the PwC survey of 226 global investors and asset management executives also warned that the economic downturn was making itself felt, with one-fifth of investors looking to reduce their exposure to real estate.

Of those questioned, 21 percent of investors said they would make smaller allocations to real estate over the next three years, the highest level by far among the five asset classes studied. Just 16 percent of investors said they would make smaller allocations to hedge funds against 15 percent for commodities, 11 percent for private equity and 10 percent for infrastructure.

The report went on to warn that 28 percent of investors and asset managers had seen a “significantly negative” impact on their real estate asset base owing to the credit crunch. By comparison, just 19 percent of hedge fund investments and 14 percent of private equity investments had been impacted in the same way.

At present, more than half all investors allocate between five and 10 percent of their assets in real estate, with 51 percent investing the same amount in infrastructure funds.

But it was real estate that gained the highest satisfaction score according to the PwC report – more than a quarter of all respondents said they were very satisfied with the performance of the asset. Private equity followed on 23 percent with infrastructure coming in last on 10 percent.

Pars Purewal, UK investment management and alternatives leader at PwC, said the credit crunch was focusing investors’ minds on the operational structure of funds, not least over issues of transparency.

“When returns start to flatten, as they have in many asset classes, investors focus more intently on operational infrastructure,” he said, adding in a statement that investors could only expect to become more “exacting” in the future.