2019 CRE Outlook: Decoding FSI investor preferences Bookmark has been added
2019 CRE Outlook: Decoding FSI investor preferences
Our latest post focuses on Commercial Real Estate (CRE) investment plans among different financial services industry investor respondents, including banks (asset management divisions), insurance companies (investment divisions), private equity, hedge funds, and mutual funds. What are the key drivers of increased CRE investment in your sector?
January 30, 2019
A blog post by Saurabh Mahajan, Real Estate manager, Deloitte Services LP.
Real estate as an asset class is drawing increased interest from global institutional investors. According to Cornell University, globally the weighted average allocation of institutional investors to real estate is expected to increase 200 basis points in 2019, to 10.6 percent.1 This trend aligns with our 2019 Commercial Real Estate Outlook2 findings where 97 percent of surveyed investors plan to increase capital commitments to CRE in 2019, with the average increase in double digits.
In this blog, we focus on CRE investment plans of different financial services industry (FSI) investor respondents, including banks (asset management divisions), insurance companies (investment divisions), private equity, hedge funds, and mutual funds. Our survey found that banks and insurance companies are most optimistic and plan an increase of 12.8 percent and 12.4 percent, respectively, in their 2019 CRE capital commitments (figure 1).
Figure 1: Planned increase in CRE capital commitments in 2019, by FSI investor type
Key drivers of increased commercial real estate investment
The key drivers of increased CRE investment vary across FSI respondents. While banks, private equity funds, and hedge funds are looking for higher yields in a relatively low interest-rate environment, insurers are looking for increased portfolio and risk diversification. Interestingly, investors specializing in industrial and mixed-use properties are most positive on superior returns, so FSI respondents looking for higher yields could target those property types.
As FSI investors plan to raise CRE investments, it is interesting to note their focus areas. In terms of markets, the US, Hong Kong, and China are the most sought-after locations. However, hedge funds have a relatively lower allocation to the US and seem to be more focused on value-added opportunities in Asia-Pacific countries.
In terms of investment themes, we found that most FSI respondents are looking beyond traditional models and property features. For instance, hedge funds and insurance players appear likely to increase allocations to properties with flexible leases and mixed-use features, while banks and private equity funds prefer new models such as properties with flexible spaces. For instance, banking and finance organizations across different parts of the world are increasing their focus on flexible spaces to attract next-gen talent.3
What does this all mean for CRE companies? With most FSI respondents upbeat about their future CRE investments, it is a good opportunity for CRE owners to expand their portfolio and FSI investor base. For instance, CRE owners with properties in primary markets can look to diversify their investor group and bring in institutional investors looking for portfolio diversification by enhancing their exposure to alternatives. On the other hand, landlords that have a good proportion of properties outside primary markets and can showcase relatively stable and above-average returns could be attractive to hedge funds, private equity funds, and banks looking for higher yields.
Further, CRE owners can look to be bolder and more innovative in their strategy as FSI investors increasingly value new trends and business models. Owners can be dynamic and unconventional across a range of aspects, including leasing strategies and property features. For instance, they can introduce more
CRE owners can look to be bolder and more innovative in their strategy as FSI investors increasingly value new trends and business models.
1 Mary Diduch, “Institutional Investors Plan to Up Their Allocations to Real Estate in 2019,” National Real Estate Investor, October 30, 2018.
2 Our 2019 CRE Outlook survey was based on responses from C-suite executives of 500 real estate institutional investors globally. For more details on survey methodology, please refer to page 28 of our outlook report downloadable at this link.
3 JLL staff reporter, “How finance firms are pioneering break-out workspace,” JLL Real Views, June 5, 2018.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.