Are real estate investors increasing risk to maintain target returns?

New survey findings have raised the question of whether global institutional real estate investors are taking on undue levels of risk to maintain return targets.

The annual investment intentions survey, carried out by real estate associations INREV, PREA and ANREV, has shown that investors are increasingly steering away from core investments in favour of higher-return strategies.

For European real estate, value-added investments – which typically involve greater risk and higher return targets than core investments – were found to be the preferred approach by 50% of investors, up from 48.7% a year ago.

The preference for opportunistic investments – the top end of the risk-return spectrum – also increased, from 10.5% to 18.8%. These findings meant that only 31.8% of investors preferred core in Europe – down from 40.8% a year ago.

Presenting the results in London, INREV’s director of research and market information Henri Vuong said: “We have seen a notable shift again up the risk curve to value-added”.

She showed that the findings were part of a long-running phenomenon, highlighting the fact that in 2013 and 2014 core investments were preferred by around half of investors, and that between 2010 and 2012 they were preferred by more than two-thirds.

The findings take on an extra significance because Europe is expected to attract the greatest volume of institutional capital (41.2%) versus North America (35.2%) and Asia-Pacific (17.4%), according to the research.

But a similar trend can be seen outside Europe. More than half (55%) of investors identified value-add strategies as the most attractive for the US real estate. Value-add was the preferred strategy for Asia-Pacific among 46.8% of investors, overtaking core – which was the preferred style a year ago.

The survey, which canvassed 320 investors and fund managers from 27 countries, estimates that institutional investors intended to commit at least €51bn to real estate in 2018.

Vuong was followed by a panel of real estate investment managers and multi-managers, who raised concerns about the apparent rise in risk appetite.

Lee Marshall, head of continental European capital for Aviva Investors’ global indirect real estate arm, said the “move up the risk curve” at such a late stage in the market cycle seemed “counter-intuitive”, and wondered if it reflected investors chasing return hurdles that had been set several years ago.

Thomas Wels, head of real estate and private markets at UBS Asset Management, agreed, saying “we saw this 10 years ago”. The appropriation of greater risk had more to do with targets than a risk-adjusted assessment, he said.

Kim Pollitzer, director of research for Europe at Invesco Real Estate, who spoke earlier in the day, said that real estate pricing in Europe was “still sustainable for some time to come”.

She said that while European real estate had underperformed North American and Asia-Pacific markets in recent years – according to the MSCI global property index – performance is likely to converge in the future.

“It will be difficult to identify a regional winner,” she said. “We need to sop talking the market down – my message for Europe.”

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