Increases in global real estate allocations by institutional investors are set to run into trillions of dollars and the shift is becoming permanent, according to Fidelity International's real estate research.
It is not a not a question of 'if', but 'when' and 'how much' more capital will flow into the asset class, according to Iryna Pylypchuk, senior European real estate analyst at Fidelity International. 'We envisage some significant implications for real estate markets going forward. This year marks the start of the second globalisation phase whereby the influence of cross-regional capital will broaden beyond the top-20 global city markets and core sectors.'
Based on its performance attributes and diversification benefits alone, the commercial real estate asset class is set for robust increase in target allocations, Pylypchuk predicted. However, two major structural shifts - broad demographic changes and the rapid rise of the Asian economy - are accelerating this growth to higher levels. Pylypchuk believes that these two factors are primed to translate into a permanent move to higher real estate allocations in broad investment portfolios.
Significantly higher allocations to both direct and indirect real estate investments will have major repercussions, she said. 'The bottom line is that once this second globalisation wave is in full swing, it will bring significant pricing implications for real estate as an asset class.'
In the short-term, Fidelity expects minor allocation increases of 1-2% in the next two to three years from European and Asian institutions alone will translate into a remarkable $450 bn (€397 bn) of new capital targeting the asset class. This is a figure close to the total commercial real estate investment turnover for both regions combined in 2015. Meanwhile, the monetary value of the total targeted increases in global real estate allocations will run to trillions of dollars, highlighting a pressing need for change in the real estate market to open up further and facilitate a growth of new products in order to absorb these amounts of new capital.
Pylypchuk believes Europe will remain the key recipient of cross-regional flows in the short to medium-term, but said that the US market is evolving fast and is also set to benefit from ongoing globalisation.
