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Institutional investors on verge of major push into real estate – survey

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Institutional investors around the world are on the verge of allocating large amounts of capital to new property investments, and the pace of annual investments in the asset class is set to continue accelerating well beyond 2014, according to a survey from Cornell University.

Institutions are now under-invested in real estate by an average 97 basis points compared with their target allocation, and they expect to increase their target allocations by an average of 52bps in 2014, the 2013 Institutional Real Estate Allocations Monitor survey found.

The survey was produced by Cornell University’s Baker Programme in Real Estate and Hodes Weill & Associates.

The survey, conducted for the first time, included responses from 198 institutional investors from 26 countries, representing more than $7trn (€5.1trn) of assets under management and more than £400bn in real estate investments.

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The under-investment was particularly pronounced in the Asia Pacific region, according to the study, where institutions were currently 134bps under-invested and expected to boost their target allocations significantly next year.

“The volume of annual investments has increased significantly in 2013, as investment teams played catch up with target allocations,” the survey’s authors said.

The weight of the new capital likely to be ploughed into property markets can be expected to have broad implications for the industry, they said.

It will affect transaction volumes, fundraising, lending activity and property valuations, they said.

“Although certain industry research has indicated the property markets are frothy, we believe the supply of capital may sustain current valuation and financing metrics,” including capitalisation rates and the cost of debt capital, the authors said.

Institutions’ investment objectives are increasingly global, the survey found, with these driving cross-border capital flows and investment activity, while investments in real estate private funds are rebounding.

This indicated, according to the authors, that investors are increasing their appetite for risk in an effort to seek higher returns.

Institutions are also continuing to shift from direct investing to outsourcing to third-party managers, they said.

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