Real estate investment and finance: strategies, structures, key decisions david hartzell download pd
David Hartzell
Visit to download the full and correct content document: https://ebookmass.com/product/real-estate-investment-and-finance-strategies-structur es-key-decisions-david-hartzell/
More products digital (pdf, epub, mobi) instant download maybe you interests ...
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data
Names Baum, Andrew E., author. Hartzell, David, author.
Title Real estate investment strategies, structures, decisions Andrew Ellis Baum, David John Hartzell.
Description Second Edition. Hoboken Wiley, 2020. Series Wiley finance Includes index.
Identifiers LCCN 2020020370 (print) LCCN 2020020371 (ebook) ISBN 9781119526094 (hardback) ISBN 9781119526063 (adobe pdf) ISBN 9781119526155 (epub)
Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK
To Randee Hartzell and Karen Baum for their unfailing support
To Jamie and David Hartzell Jr and to David, Daniel and Josie Baum for helping us to understand the important things in life
2
Lesson 1: Too Much Lending to Property is Dangerous 80 Lesson 2: Yields are Mean-Reverting – Unless Real Risk-Free Rates Change
Lesson 3: Look at Yields on Index-Linked
CHAPTER 3
Market Fundamentals and Rent 83
3.1 Introduction:
3.2.1 Rent and Operational Profits
3.2.3 Rent as the Price of Space
3.2.4 Supply
3.2.5 Demand
4.3.4 Real
4.4 The
4.4.1 The
4.4.2 The
4.4.3 The
4.5.5 Example
4.5.6 Fair
5.2.1 Introduction
6.4.7 Brokerage
7.3 Developing a Pro Forma Income Statement
7.3.1 Calculating Total Revenues
7.3.2 Estimating
7.3.3 Estimating Operating Expenses
7.3.4 Calculating
7.4 Valuation
7.4.1 An Aside on Capitalization Rates
Estimating the Market Cap Rate
Cap Rates are the Inverse of Price/Earnings Ratios 195 Using Cap Rates to Value the Apartment Project
Calculating the Implied Cap Rate for the Apartment
7.5 Investment Analysis Using Operating Income: Multiple-Year Cash Flows
7.5.1 Operating Cash Flows from Leasing
7.5.2 Cash Flows from Disposition
7.6 Applying
CHAPTER 8
7.6.3 Partitioning the Internal Rate of Return
the Maximum Price to Pay
Analysis of “The Station” Development
“Back-of-the-Envelope”
10.4 Formal Analysis of Development of “The Station”
“The
Growth of the Unlisted
Much
Fund Structures
14.4 Wall Street Act II: Senior-Subordinated Securities, the Advent of Structured Finance
14.4.1 The Coast Federal Savings and Loan Deal
14.4.2 Risk and Return Characteristics of the Senior-Subordinated Structures
14.5 Wall Street Act III: The Evolution of Structured Finance
14.5.1 An Updated Look at the Senior-Subordinated Security 359
14.5.2 Who Profits from these Transactions?
14.6 Collateralized Debt Obligations
14.7 Mezzanine Debt
14.7.1 Mezzanine: The Background
14.7.2 Mezzanine Structures
14.7.3 A UK Example
14.8 Whole Loans and Synthetic Mezzanine
14.9 Income Strips
14.10 Cash-out Refinancing
14.11 All Good Things Must Come to an End
14.11.1 The Cash-out Refinancing Example Extended
14.12 Post-crisis Recovery
14.12.1 A Final Update to the Cash-out Refinancing Example 382 14.13 Conclusion
PART FOUR
Creating a Property Investment Portfolio
15.2.1 Current Portfolio
15.2.2 Strengths, Weaknesses, Constraints
15.2.3 Structure and Stock Selection
15.3 Portfolio Construction
15.3.1 Top-Down or Bottom-Up?
15.3.2 Mixing Listed and Unlisted Real Estate
15.3.3 Can Real Estate Investors Build Efficient Portfolios?
15.4 Conclusion
16.3 The
16.4.5 Execution
16.6.5 Geographical
16.6.6 Political
16.6.7 Cultural
16.7.3 Putting
16.8.2 Using a ‘Currency
16.8.3 Using
16.8.4 Hedging
16.8.5 Leverage,
17.2.2 Example:
17.3.1 Changes in
17.3.2 The
17.4 Attribution Analysis: The Property Level
17.5 Attribution Analysis: The Portfolio Level
17.5.1 Introduction
Choice of Segmentation
17.5.5 City or Metropolitan
17.5.6 Two or Three Terms?
17.5.7 The Formulae
17.5.8 Results
17.6 Attribution
17.7.2 The Asymmetry of Performance
17.7.3 An
18.3.3 Occupier
Acknowledgements
We would like to thank many people without whom this book could never have been written. These are primarily our professional colleagues at Salomon Brothers, Heitman, Highwoods Properties, Prudential, Henderson, Invesco, and CBRE Investors, and our students. This means, primarily, our MBA students based at the Kenan-Flagler Business School at the University of North Carolina, the Saïd Business School at the University of Oxford, and the Judge Business School, University of Cambridge, as well as our students on the University of Reading MSc Real Estate course. In addition, our ideas have been corrected by our academic colleagues at UNC, Reading, Cambridge, and Oxford.
Some of the material in this book has appeared in a similar form in Andrew Baum’s Commercial Real Estate Investment: A Strategic Approach (Elsevier), which was written in 2009 largely for a UK readership. In preparing much of the material both in this predecessor work and the new book, we have been very fortunate to have had the help of expert co-authors. The following have been especially helpful.
Graeme Newell of the University of Western Sydney contributed material about Australia and the box on sovereign wealth funds in Chapter 1. Nadja Savic de Jager, Shane Taylor, and Isaac Carrascal of CBRE Global Investors wrote about the continental European and Asian markets in Chapter 2. Yu Shu Ming and Ho Kim Hin of the National University of Singapore helped us with material about Asian markets, especially in Chapter 2. Ehsan Soroush and Nick Wilson contributed the box about Dubai in Chapter 2. Sabina Kalyan wrote the section on the economics of rent in Chapter 3, and Bryan MacGregor of the University of Aberdeen developed some of the forecasting material in Chapter 3. Andrew Schofield of Henderson Global Investors contributed many of the ideas in Chapter 4; Neil Crosby of the University of Reading is co-author of parts of Chapter 5; and Kieran Farrelly of CBRE Investors wrote parts of Chapters 13 and 17. Claudia Beatriz Murray of the University of Reading contributed part of Chapter 15. Tony Key contributed part of Chapter 17. Andrew Baum worked with Andrew Petersen of K&L Gates on the text Real Estate Finance: Law, Regulation & Practice (LexisNexis, 2008), which provided the basis for the Glossary.
In addition, we would like to thank Alex Moss, Gary McNamara, Steven Devaney, James Boyd-Philips, Daniel Baum, Jamie Hartzell, David Hartzell, Jr., Peter Struempell, Malcolm Frodsham, and Matt Richardson.
Andrew Baum would like to thank his partners at Real Estate Strategy, OPC and Property Funds Research, including Jeremy Plummer, now of CBRE Global Investors, who helped to develop many of the ideas in Chapters 15 and 16, and Nick Colley and Jane Fear, who provided many of the second edition updates.
David Hartzell would like to thank David Watkins, with SHA Capital Partners (formerly with Heitman Capital Management) in Chicago, for helping develop intuition during the many hours and years spent discussing all aspects of the real estate industry, as well as his former and current colleagues at the University of North Carolina and at the Wood Center for Real Estate Studies. Thanks also go to Brent Morris and Tim Wang at Clarion Investment for their help with data and analysis. Without the feedback, support, and good humor of thousands of MBA students at Kenan-Flagler, this book would not have been written, and life would not be nearly as much fun. Particular thanks are due to those students who helped with editing and spreadsheet development, including John Clarkson, Mike Aiken, Alexis Lefebvre, Heather Moylan, and Adam Hyder for the first edition, and Andrew Shrock, Rich Dougherty, Elliot Salman, Will McGuire, Mark Matthews, Colin Hartley, Paul Bode, and Zach Spencer for the second edition.
About the Authors
David Hartzell joined the faculty at the University of North Carolina in July 1988. During his tenure at UNC, he has taught finance and real estate courses in the undergraduate, MBA, PhD, and Executive Education Programs. He has received teaching awards at the undergraduate level at UNC, and at the MBA level at the University of Texas and at UNC.
Dave is the Steven D. Bell and Leonard W. Wood Distinguished Professor of Finance and Real Estate. He has served for most of his years at UNC as the coordinator of the Real Estate Concentration within the UNC MBA Program. In addition, he serves as the Director of the Wood Center for Real Estate Studies (www.realestate.unc.edu). He is also a Fellow of the Private Equity Research Consortium at the Kenan Institute.
He serves on the Board of Directors of Highwoods Properties, a publicly traded Real Estate Investment Trust (REIT) that invests in and develops office buildings. He serves on the Investment Committee and the Audit Committee. He is the faculty advisor and also serves on the Board of the UNC Real Estate Investment Fund, the first and only true student-managed real estate private equity fund. He was also appointed to the Investment Advisory Committee of the $100 billion North Carolina Retirement System by the NC State Treasurer in 2011.
Dave is a former vice president at Salomon Brothers Inc. in New York, where his primary focus was on institutional real estate finance and investments. Dave has worked with numerous international companies on a consulting basis, most notably Heitman Capital Management in Chicago, with whom he was affiliated from 1994 to 2010.
He received his PhD in Finance from the Business School at UNC-Chapel Hill and his MA and BS in Economics from the University of Delaware, receiving the Distinguished Alumni Award from the University of Delaware in 2000.
Andrew Baum is Professor of Practice at the Saïd Business School, University of Oxford and Professor Emeritus at the University of Reading. He was Honorary Professor of Real Estate Investment at the University of Cambridge 2009–14, and Fellow of St John’s College, Cambridge 2011–14. He is Chairman of Newcore Capital Management, a real estate fund manager focused on alternatives, and advisor to several property organisations. He has held senior executive and non-executive positions with Grosvenor, The Crown Estate, CBRE Global Investors, and others. He was hired as the first director of property research for Prudential in 1987. He founded RES (a property research company) in 1990 and sold the business to Henderson Global Investors in 1997. At that time he became Chief Investment Officer (Property) at Henderson and later Director of International Property. In 2001 he founded OPC, a property research and investment company, which was sold to CBRE Investors to create CBRE Global Investment Partners, which now has over $30bn of assets under management.
He holds BSc, MPhil, and PhD degrees from the University of Reading, and is a graduate of the London Business School investment management programme, a chartered surveyor and a qualified member of the CFA Institute (ASIP). He is the author of over 50 refereed journal papers and book chapters. PropTech 3.0: The Future of Real Estate is the most downloaded Saïd Business School, University of Oxford report.
Baum, currently Director of the Oxford Future of Real Estate Initiative, was voted one of the top 3 most influential people in PropTech in the 2017 Lendinvest list and was winner of the UK PropTech Association Special Achievement award for 2019. He is founder and former president of the Reading Real Estate Foundation, an educational charity established to support real estate education. He was elected Academic Fellow of the Urban Land Institute in 2001, the first such election outside the USA, and Honorary Fellow of the Society of Property Researchers in 2002.
Andy and Dave are both married to their high school sweethearts, are both proud parents and (now, since the first edition) grandparents. Both played university soccer, Dave as a starter on the Division I Blue Hen soccer team at the University of Delaware, Andy for British Universities. Both play old timey mandolin less well than they would like.
Preface
It is a difficult challenge in a book like this which combines finance, law, and real estate to avoid over-complication while at the same time preventing over-simplification. This challenge is amplified many times when adopting a global perspective. In addition to periodic shocks and crashes (the latest of which, COVID-19, has shaken the foundations of real estate markets and challenged the globalization of finance), there are many different systems controlling land ownership; different approaches to investment regulation; different tax and accounting regimes; and a myriad of structures underpinning investment vehicles. To attempt to extract some global truths from this web could be regarded as over-ambitious. In deliberately adopting a global perspective, we must acknowledge the lens through which we view this world, which is designed in the UK and the USA, continental Europe and Asia, in that order.
Happily, increasing globalization allows some generalization from one US-based author and one European. We have been lucky to have worked together enough to know how and where to jump over the language barrier. The most widely accepted real estate transparency index (Jones Lang LaSalle, 2010) ranks, largely on the grounds of information availability, the UK and the USA in the top group of all global markets, with Canada, Australia, New Zealand, and Sweden. The longest, most detailed, and most heavily analysed datasets describing real estate performance in the modern era exist in the UK and the USA. The book is therefore the result of the authors’ varied experience of applied property research, property fund management, international property investment, and academic research in these two leading markets and elsewhere, including the Asian, Australian, European, and developing markets.
The subject matter can be described broadly as institutional investment in real estate, and the foundation is an international and capital markets context viewed from the perspective of property investment and finance professionals. The objective of this book is to provide insights that will help global real estate investors of all types make more informed decisions.
Investors in real estate can take many different forms. At one end of the investor spectrum are individual investors hoping to increase their wealth by buying and holding investment property. By holding direct investments in buildings, they hope to earn income from rents and from selling the asset at the end of a holding period for more than they paid for it.
At the other end of the spectrum are institutional investors like sovereign wealth funds, life insurance companies, and pension funds that may hold large portfolios of individual properties, or shares in partnerships or funds, or publicly traded securities secured on real estate. They do this to add diversification to portfolios that are often dominated by securities.
At either end of the spectrum, or anywhere in between, investors should be aware of four different aspects of real estate investment, which represent the four parts of this book.
PART I: REAL ESTATE AS AN INVESTMENT: AN INTRODUCTION
First, there is a context and a history for real estate investing around the globe. How does real estate compare to other asset classes, and how has it performed over time? What basic economics and finance theories help us to understand this context?
Real estate, usually seen as an excellent but illiquid diversifier (see Chapter 1), has been a part of investor portfolios for most of the 20th and 21st centuries. Since the 1970s, real estate has become more accessible for a broader cross-section of the investing universe. Through vehicles such as Real Estate Investment Trusts (REITs), individual investors have greater access to real estate investments. In addition, the development of real estate partnerships and other ownership forms has also led to more availability for investors. Further, regulations have created an incentive for institutional investors to expand the amount of money that they invest in real estate and pension funds, life insurance companies, and high-net-worth individuals have all increased their allocations to real estate. Since the 1970s, these investors have both made and lost a great deal of wealth, depending upon when they placed their money into the real estate asset class and where that money was invested. Understanding their motivation for investing in real estate is critical to developing an investor mindset.
An important aspect of real estate markets, and investment in them, is cyclicality (see Chapter 2). In the USA since the 1970s, three complete cycles have run their course. Similar cycles have been demonstrated around the world in the UK, Europe, and Asia Pacific. Generally, prices of real estate assets reach high levels due to strong interest by investors; prices paid as the cycle takes an upswing are unrelated to the underlying supply and demand for space in the local market where tenants lease space; and when the underlying demand and supply fundamentals deteriorate in the local market, prices must adjust downward.
The US real estate market has experienced three distinct cycles since the 1960s, and each was caused by similar occurrences. Some subset of investors or lenders miscalculated the risk of owning real estate, and bought property for prices that in retrospect were too high. Once the market corrected to more accurately reflect the risk, prices fell dramatically and large amounts of individual and institutional wealth were destroyed. This happened in the USA in the 1970s, again in the 1980s and early 1990s, and most recently in the latter part of the first decade of the 21st century. Similar cyclicality was experienced at different times and for slightly different reasons around the world. To deal with the inevitable cyclicality in future real estate markets, we need to understand the economics of rent (Chapter 3) and the finance-based theories of asset pricing (Chapter 4). We have to be able to answer this question: What is a fair price for real estate?
PART II: MAKING INVESTMENT DECISIONS AT THE PROPERTY LEVEL
Few, if any, of the investors that bought property as a wealth-enhancing asset during the upside of the last cycle anticipated that the property would lose value and that they would suffer a loss in wealth due to the investment. It is more likely that they expected to earn income and to have the value of the property appreciate during their holding period. However, due to a misunderstanding of the characteristics of real estate investment, these investors were sorely disappointed in their experience.
There are numerous techniques used to evaluate real estate investments, ranging from simple back-of-the-envelope heuristics to complex and dynamic valuation models using discounted cash flow analysis and real options. One thing that has clearly changed in the real estate industry is the level of sophistication among real estate investors and the amount of time and analytical power they devote to analyzing potential real estate investments. This has partly occurred due to the increasing professionalization of the industry, and also to the large amounts of money that are being invested in the real estate asset class.
Like any investment, determining investment value and how much to pay for a real estate asset requires making some judgment regarding the future cash flows expected to be earned by the property. Generally, income from a real estate asset comes in the form of income produced by renting the property to tenants and from value appreciation during the period which the asset is held. Since these cash flows must be forecast into the future, and the future is impossible to predict, the difference between realized cash flows earned and expected cash flows can be substantial.
Risk can be defined as uncertainty of future outcomes. For those investments that exhibit greater uncertainty, the risk will be greater as well. Generally, investors in real estate have valued assets too highly because they do not fully appreciate the risk, or uncertainty, that an investment exhibits. This mis-estimation allows them to pay prices that are too high relative to the property’s fair value.
The ability to model cash flows using discounted cash flow analysis is essential to understanding how to value assets (see Chapter 5). Developing expertise in generating expectations of cash flows, and adjusting valuations for the risk involved in the investment, helps to ensure that an investor does not overpay for a real estate investment. We also need to understand the impact of leases (Chapter 6) and be able to build an income statement (Chapter 7). We have to understand the common forms of debt finance, especially mortgages (Chapter 8), and model the impact of leverage and taxes (Chapter 9). In a new chapter for this second edition, we have added a case-based discussion of real estate development viability (Chapter 10).
However, while we believe that spreadsheets are wonderful (and that they should be pushed hard to explore the various option pricing and simulation techniques we do not have space to deal with properly in this book), many investors have made the mistake of letting their spreadsheet analysis make their investment decisions for them. It is important to recognize that techniques for valuation are merely tools to be used in making decisions, and are only a small part of the overall assessment process.
PART III: REAL ESTATE INVESTMENT STRUCTURES
The nature of real estate as an asset class brings with it two key problems. It is expensive to buy, leading to “lumpy” portfolios, low levels of diversification, and high levels of asset-specific risk; and it is illiquid. Various investment structures have been developed to cope with these issues, with such success that these structures now dominate the global investment strategies of most new entrants to the market.
Diversification and specific risk reduction have been the motivation for developing a private equity, or unlisted, real estate fund (Chapter 11). It is essential that we understand how carried interest structures work in joint ventures, simple co-investment funds, and private equity real estate funds (Chapter 12), and to consider how this may influence incentives and decision-making.
The same driver, plus an attempt to add liquidity, is a feature of REITs and other public equity real estate formats (Chapter 13), and liquid exposure to what should be low-risk, property-based debt income is the goal of the structured finance market described in Chapter 14.
PART IV: CREATING A GLOBAL REAL ESTATE STRATEGY
The institutional investment community has come to play a far greater role in the real estate investment universe in recent years. Pension funds and life insurance companies, as well as sovereign wealth funds and investor groups in the form of public REITs and private equity funds, have invested large amounts of wealth into the real estate asset class. Instead of purchasing one property, these investors hold portfolios of many properties, often across different property types and across different geographic markets. Real estate portfolio management requires an understanding of how the investment performance of different properties will interact when they are combined in a portfolio. One of the basic tenets of modern portfolio theory is that combining assets that perform differently over the investment horizon can lower the volatility of the portfolio relative to the volatility of the individual assets. Therefore, there is value to finding and investing in assets and sectors that are expected to perform differently in the future (Chapter 15).
One might expect this to imply the necessity of a global strategy. However, using the structures described in Part III, as global investors inevitably have and will, produces distortions that complicate the global portfolio strategy as well as the pricing approach we developed in Parts I and II. For the larger investors, these different markets are located around the world. This creates a series of very challenging problems, examined in Chapter 16.
Finally, as investors or as managers we need to understand when and where an investment strategy has been successful. Have the returns been adequate, and what drove them? This is the subject of Chapter 17, after which we draw some final conclusions – and look ahead to the future – in Chapter 18.
Real Estate Investment
Real Estate – The Global Asset
1.1 THE GLOBAL PROPERTY INVESTMENT UNIVERSE
Real estate is usually identified as a discrete, or separate, component of an investment portfolio. It may be part of an allocation to ‘alternatives’ (financial assets that do not fall into one of the conventional investment categories of stocks, bonds, and cash); it may be part of an allocation to ‘real assets’ (physical assets that have an intrinsic worth and which are expected to be a hedge against inflation); or it may be part of an allocation to private markets (assets such as private equity or private debt which are not listed on a public exchange). Whichever is the case, real estate (including owner-occupied housing and farmland) constitutes a very large proportion of the world’s wealth and (excluding these asset types) a significant slice of its institutional savings base.
What proportion of an investment portfolio should be in real estate? What proportion of the real estate portfolio should be invested in the USA, or Russia, or continental Europe?
A new investor building a global portfolio might reasonably want to know the composition by value of the ‘market portfolio’ – the total value of all investable assets, like stocks and bonds, added together. Given this, it is possible to imagine how your portfolio might be constituted, even if you had no views about the future performance of those assets. Assuming there were no ‘friction costs’, meaning the time and cost involved in accessing certain markets, which makes some less attractive than others, constructing a market portfolio would make some sense, especially given that it appears that we are less good at forecasting market returns than we think we are.
We can estimate the size of the public equity markets at any time by adding together the market capitalisation of the various global stock markets. We can do the same with publicly listed bonds. Private equity is more of a challenge, however, and real estate also creates significant difficulties. Many of the real estate assets in the world are never valued. There is a lack of transparency in many markets, and the generally low levels of information available in Asia and the emerging markets of the world mean that we do not know much about the size of the investable property markets in China, India, and Pakistan, despite their huge populations and increasingly significant gross domestic product (GDP). Even the total value of all US housing is subject to debate.
Nevertheless, we do have something to go on. While it has been estimated that real estate might comprise as much as 50% of the total value of the world’s assets, this may not represent the value of the investable stock (after all, we have no intention of selling our homes in North Carolina and Oxfordshire to a sovereign wealth fund). We have no easy way of estimating the investable stock either, but we can have a stab at estimating the invested stock and adjusting that value upwards. This is the approach typically taken by analysts.
The value of the investable stock of commercial property owned by institutional investors around the world was estimated (by CBRE, 2017) to be around $27.5 trillion and by Property Funds Research (PFR) and others in 2019 at around £35 trillion. This is defined as stock that is of sufficient quality to become the focus of institutional investment. This estimate must be taken as the broadest possible guide. This value can be compared with a global equity market capitalisation of close to $69 trillion in January 2019 (World Federation of Exchanges). Assuming a typical equity exposure of say 50%, this suggests a market portfolio weight for real estate of around 20–25%. Institutional exposure (averaging around 10% globally – see Figure 1.4 later) remains below the market portfolio weight, suggesting that something appears to limit institutional investors’ commitment to this asset class.
It appears that 10% is a robust estimate of current allocations to real estate. The 2018 Hodes Weill Allocations Monitor (Hodes Weill/Cornell, 2018) included research collected on a blind basis from 208 institutional investors in 29 countries. The 2018 participants held total assets under management exceeding $11.0 trillion and had portfolio investments in real estate totalling approximately $1.0 trillion or 9% of total assets. Average target allocations to real estate increased to 10.4% in 2018, up 30 basis points (bps) from 2017 and up approximately 150 bps since 2013. Despite an increase in actual allocations, institutions remained meaningfully under-invested relative to target allocations. While 92% of institutions reported that they are actively investing in real estate, institutions remained approximately 90 bps under-invested relative to target allocations.
The $35 trillion investable stock of property can be broken down to the regional level (see Table 1.1). According to similar sources, the global market is split by asset value into 28% North America and Europe, 32% Asia, and the remaining 11% in the other regions.
The USA and Japan are the two largest single-country markets in the world. The UK is the third largest global market.
Sources: PFR, PGIM, IMF, and EPRA
TABLE 1.1 The global property investment universe ($ billion)
