If you have heard out investment pundits, you would have memories of them preaching that real estate is the most un-remunerative asset class—before or after gold. That hasn’t stopped the “billion dollar club” of global real estate investments from swelling to 499 institutional investors at the end of July.
According to London-headquartered Preqin, a provider of data on investments in alternative assets, the billion dollar club comprises institutional investors which allocate $1 billion or more to real estate. This club grew 13% in terms of the number of investor, from 442 in 2017, showing the abiding interest in real estate investments.
In value terms, the billion dollar club investors have $2.53 trillion allocated to the asset class, equivalent to 84% of the $3.01 trillion in assets held by the industry. This, in Preqin’s assessment, is up substantially from the $2.19 trillion that they allocated in 2017, as almost all investor types in the club saw double-digit percentage point increases to their allocations.
“It is striking that this figure has grown so much over the past year, and perhaps reflects a trend towards inflation-hedging and non-correlated assets on the part of investors," says Tom Carr, Preqin's head of real estate products.
Carr explains that the appeal of real estate is strong. Opportunities for investment in the asset class are diverse both globally and across risk/return profiles. Also, at disposal are different methods of accessing the asset class: from liquid real estate investment trusts (REITs) to long-term direct acquisitions of “trophy” assets.
“This allows investors to manage their liquidity and investment preferences without correlating their real estate portfolios more closely to public market investments,” says Carr. One may see more investors position themselves in anticipation of a market shift in the coming months and embrace real estate investments further, he adds.
Public pension funds and insurance companies comprise the largest proportions of the club, accounting for 28% and 21% of its members, respectively, with each accounting for 26% of aggregate allocations, says Preqin.
While West Asia-based institutions account for only 2% of the number of investors in the club, they collectively allocate $131 billion to real estate. Institutions contributing to this figure include the largest investor in real estate—Abu Dhabi Investment Authority (ADIA), which allocates $62.1 billion to the asset class. And, ADIA is followed by Investment Corporation of Dubai and Kuwait Investment Authority with real estate allocations of $33.4 billion, and $17.3 billion, respectively.
Preqin also highlights the differences in the portfolio weight given to real estate by the club’s investors and those that allocate less than $1 billion to the asset class. “The average current allocation to real estate in the club is 11.1% of assets under management (AUM), with a target allocation of 12.1%,” Preqin notes. In contrast, “all other real estate investors have an average current allocation of 8.0%, with a target of 9.7%,” it says.
The disparity between the two groups also reflects in the way they gain exposure to the asset class. While both, the club and all other investors, are active through private real estate funds, a greater proportion of the billion dollar club investors make direct investments in the asset class than those allocating less than a billion.
“Investing directly in real estate generally requires significant human and capital resources and is therefore more often implemented by investors with sizeable AUM and substantial knowledge of the asset class,” Preqin explains. It cites the case of London-headquartered Aviva Investors, an asset manager with real estate allocation of $46.9 billion—representing 10% of its portfolio—as one among the largest investors in real estate and gains exposure solely through direct investments.
The private real estate fundraising landscape is increasingly competitive. In July, with 614 instances, there were more vehicles on the road than ever before, and with a record amount of capital targeted—$206 billion. “As a result, first-time fund managers have faced a challenging time, accounting for only 6% of aggregate capital raised by real estate fund managers so far in 2018,” says Preqin.
However, the appetite for these funds remains strong within the billion dollar club: 30% of investors in this group actively invest in first-time funds and a further 14% will consider such investments.
Clearly, the choice of asset class is a function of the type of investors and their span of investment period. For sovereign wealth funds, pension funds, and insurance companies—which tend to invest for the long term—real estate provides both rental yields and capital appreciation.
Expert advice on buying, renting or selling in Dubai Marina
90+ Buildings to choose from. Inquire now.