Institutional investors around the world continued boosting their target allocations to real estate in 2017, according to a new survey, but at a slower pace and while reaping smaller returns on the asset class.

The average target real estate allocation increased to 10.1% in 2017, up from 9.9% in 2016, according to Hodes Weill & Associates and Cornell University’s fifth annual Institutional Real Estate Allocations Monitor.

In the past five years, institutional portfolios lifted their actual exposure to real estate to 9.1% invested from 8.5%, the survey revealed.

Hodes Weill and Cornell University said this implied real estate portfolios had grown by around $500bn (€422bn) in the period, through a combination of capital appreciation and new investments.

Although real estate had enjoyed a steady uptick in target allocations, the pace of increases in target allocations was moderating, the survey found.

It showed that the rate of increase in target allocations calmed to 20 basis points in 2017 compared to an average of 30 to 40 basis points per year since 2013.

Also, in 2017 some 22% of institutional investors polled expected to increase target allocations over the next 12 months, but this was down from 30% in 2016. 

Douglas Weill, Hodes Weill managing partner, said: “While exceeding the 10% threshold is a seminal moment, the steady growth in allocations to real estate that the industry has experienced over the years appears poised to decelerate in the near term.”

This was mainly because investor confidence was waning, he said, adding that this trend had become stronger since the firm first started running the survey.

“However, we anticipate that the long-term outlook for institutional capital allocations to real estate will remain positive given the asset class’ many benefits,” he said.

Returns on institutional real estate portfolios worldwide were an average 8.6% in 2016, down from 11% in 2015, according to the survey.

But it also showed returns had exceeded targets by 20 basis points, and the survey’s authors said they were still well ahead of global return indices for real estate.

Institutions in the Asia Pacific region made the highest average annual return in 2016 at 9.3%, according to the data, followed by those in the Americas at 8.7%.

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