Institutional investors, including banks, insurance companies, pensions and REITs, will rein in capital commitments to real estate an average 19 percent this year, on track to total $62 billion, according to a new survey by Institutional Real Estate, Inc. (IREI), an institutional real estate investment consultant, and Kingsley Associates, a real estate research firm.
“The decline in new capital flows can be largely attributed to two primary factors: U.S. survey respondents reported real estate holdings exceeding their target allocations to real estate, which reduces the need for new capital commitments,” explains Jim Woidat, a principal at Kingsley Associates. “In addition, investors report a significant uncalled capital overhang of $47 billion, which also limits the need for new capital deployment.”
Despite the pull-back, the survey, 2017 Institutional Investors Real Estate Trends, shows investors are largely confident in U.S. real estate, with 72 percent of respondents planning to make new commitments, specifically in the industrial and multifamily sectors, in 2017. Core properties and value-added properties will be on the receiving end of most of the new capital.
“Real estate investors have enjoyed healthy returns post–global financial crisis, but it’s evident from the survey that they are showing more caution at this point in the cycle,” says Geoffrey Dohrmann, president and CEO of IREI. “U.S. investors dialed back their total return expectations for real estate from 8.7 percent last year to 7.4 percent for this year; however, on a risk-adjusted basis, respondents ranked real estate as the most attractive asset class for the seventh consecutive year.”
Institutional investors have become a thorn in the side of first-time homebuyers, creating added competition in a housing market with already squeezed supply.
“Supply and demand imbalances continue to be burdensome in many markets,” said National Association of REALTORS® (NAR) President Bill Brown earlier this year, citing Fannie Mae’s support of a single-family rental institutional investor. “This will only further hamper tight supply and put major investors in direct competition with traditional buyers.”
Sources: Institutional Real Estate, Inc., Kingsley Associates
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