Real estate to enjoy significant capital inflows

With institutional investors underweight to the asset class by roughly 2%, industry professionals argue billions of dollars of additional capital will come back to global real estate, not least from sovereign wealth funds.

Billions of dollars of capital is poised to flow back into real estate over the next few years as institutional investors globally continue to eye the asset class.

Institutional investors and sovereign wealth funds have already started deploying significant amounts of equity over the past 12 months, not least to core assets in prime markets. However, industry professionals speaking at the Goodwin Procter/Columbia Business School real estate capital markets conference today said investors were still under allocated to the asset class.

I think people will be pleasantly surprised by how much capital flows into real estate, and not just core.

David Hodes, co-founder of advisory firm Hodes Weill & Associates

David Hodes, co-founder of advisory firm Hodes Weill & Associates, said the under allocation to real estate, which includes core, value-added and opportunistic strategies, by around 2 percent.

“I think people will be pleasantly surprised by how much capital flows into real estate, and not just core,” he said, adding that many investors would start moving up the risk spectrum and away from core, stabilised product “out of sheer necessity. People will start allocating a little more risk in their real estate portfolios.”

He later explained that with total plan assets of up to $2 trillion, institutitional investors could have up to $40 billion of capital ready to allocate to real estate. Coupled with sovereign wealth fund equity and other investor capital and the asset class could see a potential $175 billion, or more, directed to real estate.

Hodes added during the panel that sovereign wealth funds would become a significant capital force in their own right as they looked to invest tens of billions of dollars in overseas properties, particularly trophy assets in developed markets such as the US and UK. “[Sovereign wealth fund] wealth grows hour by hour,” said Hodes. “[But] putting it to work is another story.”

Indeed, other panelists, including Ric Clarke, chief executive officer of Brookfield Properties, and Beacon Capital Management chairman and chief executive, Alan Leventhal, told the annual conference in in New York that deals were still hard to come by in the US.

“The toughest thing for us is finding deals that make sense,” said Clarke, while Leventhal added: “In today’s environment you are paying full price for everything.”

Both men warned the US market had bifurcated between the core markets on the East and West coast of the US, and everything else in the middle. As a GP targeting a handful of prime cities globally, Leventhal said it was “very hard to find product” that could generate value-added and opportunistic returns for Beacon’s funds. “It’s very, very competitive.”

Leventhal said, though, things were starting to change. Telling the delegates the firm had just held its longest investment committee meeting in almost two years, he said: “We are seeing an increasing amount of activity.”