IPE Real Estate's survey of European institutional real estate investors found that the top 100 account for €135bn in real estate AUM globally. Martin Hurst presents some of the findings which show little movement between current and target allocations

IPE Real Estate carried out its first major survey of investor allocations to property and published the rankings in the March/April issue. The survey was carried out between last October and February; real estate allocations of respondents averaged just below €500m, the largest being €3bn and the smallest €300,000. Just under a fifth of respondents had allocations of €1bn or more.

The survey showed that in the downturn real estate continues to drag on performance with the asset class delivering a -2.2% return compared with total portfolio performance in the black at 6.6%, according to investor's most current performance data at the time of the survey. This compares with 2008 when both the real estate and total portfolios returned -9%.

In terms of their latest figures, 10% of respondents reported negative returns of 25% or more compared with 20% of respondents in 2008. The figures showed positive returns in 55% of cases compared with 40% in 2008. Both findings are in line with the perception that the worst of the market downturn is now behind us, though clearly confidence is taking longer to return to real estate than other asset classes.

The average strategic weighting to real estate was 14.1%, only slightly different to the target allocation. The figure is slightly higher than might have been expected given the participation in the survey by specialist real estate investment companies representing a number of pension funds. About 65% of respondents had target allocations of up to 10%; around 10% had allocations of between 10% and 20%.

In terms of property type, office is the most popular, accounting for 37% of target allocations, with retail and residential at 25% and 22% respectively. The most notable trend is a slight shift from office, with industrials/logistics being the main beneficiary, registering an average target allocation of 13%.

Allocations to core strategies are expected to remain unchanged relative to where they stood at the time of the survey, with the average target allocation at 71%, value-add at 17% and opportunistic at 12%. This reflects the preference of many investors for plain vanilla core income generating product while so much uncertainty remains.

After concerns that "diversification is dead" as the value of real estate investments fell across the board during the downturn, and as investors returned to more familiar investments at home, international diversification is on the increase again, according to our survey. Target allocations to domestic real estate are at 54% compared with the latest allocation of 60%, to Europe ex-domestic at 33% compared with 31% currently, to the US at 7% versus 5% currently and Asia at 5%, up 1% on the current allocation of 4%.

Some 60% of domestic allocations were in direct real estate, with 22% in non-listed open-ended funds and 16% in REITs, in line with expectations that many of those with domestic allocations tend to manage them directly. In terms of the international allocation the picture was quite different with 40% in non-listed open-ended funds 42% in non-listed closed-ended funds and 11% in REITs, with only 7% invested directly. There were no allocations to property derivatives.

The survey showed that allocations to club deals and segregated funds were expected to increase, reflecting a desire among investors for greater control in investment strategy and decision making. Target allocations to non-listed open and closed ended funds are 15% and 19% respectively, almost unchanged relative to the allocation at the time of the survey, which is interesting given remarks that there may be a shift away from the pooled funds model given concerns about liquidity and transparency that arose during the downturn.

The survey also revealed that while most indirect investment was externally managed - 60% for listed and 81% for non-listed - in the case of nearly two-thirds of respondents direct real estate was internally managed. As mentioned above there is a marked tendency to domestic real estate.

On average the investors questioned employed five external managers with one in six respondents employing 10 or more.

On average respondents employed four investment professionals with a third of respondents employing 20 or more, but almost half of respondents reported no real estate investment specialists within their organisations, which is in line with the average allocation of around €500m.