Investors set to increase allocation to real estate

Real estate will play an ever increasing role in institutional investors’ portfolio, according to Joseph Azelby, head of global real estate at JP Morgan Asset Management.

Azelby, who was speaking at the Inrev annual conference in Barcelona, said real estate is likely to turn from being an alternative asset class to become a mainstream investment over the next decade.

‘Real estate is going to have a couple of new neighbours, energy and infrastructure, forming the real asset class. Investors' allocation to this asset class will potentially rise from 10% to 25% in the future,’ he predicted. ‘Real estate will be the largest of this class, but don’t play in this space if you need liquidity.’

In a market where investors are 'dying for diversification', real estate can provide a good income and total return potential, lower volatility, and a refuge from inflation. ‘Real estate has higher current income potential than bonds. Real estate has lower volatility than equities. Also real estate is not strongly correlated to global fixed income,’ Azelby said.

EXPANDING IN PROPERTY
A number of large institutional investors including the Teacher Retirement System of Texas are already expanding their property portfolios. The Canada Pension Plan Investment Board (CPPIB) is ‘going towards’ a 20% exposure to real assets, said Wenzel Hoberg, managing director and head of real estate investments Europe at CPPIB. ‘We have doubled our holdings over the past 10 years and we will double them again in the next 10 years,’ said Hoberg, who joined Inrev’s board last month.

With bond yields remaining at or near historical lows, investors believe it is the right time to diversity into real assets. 'Equities are volatile and heavily correlated,’ said Azelby.

Alex Jeffrey, CEO of M&G Real Estate, the property investment arm of Prudential, said the company has recently stepped into UK residential as a way to diversify its portfolio. ‘It is good to find sectors which are not so closely correlated. Residential is not an institutional asset class in the UK and has little correlation to the rest of the industry,’ he noted.

POSITIVE FORECAST
Market experts seem to agree that the years ahead will offer ‘great returns’ for the sector. Economist Roger Nightingale sees a great period ahead for real estate. ‘We are at a time when equity will see a long period of very positive good returns. If we think back to the decade after the 1929 crisis, the sector showed a 15% real return and capital valuations.’

According to Jerry Speyer, chairman and co-CEO of Tishman Speyer, the industry should benefit from the record amount of capital accumulated in the private sector. ‘The world has been in deleveraging mode since the downturn but there has been a great accumulation of cash in many parts of the world. There has never been another time in the US where corporations have had so much money on their balance sheets. I think the private sector is on a cusp with great growth potential ahead. It’s inevitable that they will take advantage of their position,’ he said.

Asked what has changed in the real estate business since the crisis, Speyer said the industry is now far less leveraged and much more careful on the selection of investment partners. ‘Having gone through a dozen downturns, it was never so clear that leverage has such a large effect. Debt is great on the way up and devastating on the way down,’ he concluded.

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