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Institutional investors set to increase their exposure to real estate: State Street research

Broad range of institutional investors, including pension funds, insurance companies, and sovereign wealth funds, is set to increase their exposure to real estate as an asset class, according to a new research from State Street.

According to State Street, regulatory changes are fundamentally changing the landscape for real estate investment on the part of both investors and real estate managers.

According to a Vision Focus paper published by State Street entitled, "Real Estate: New Opportunities for Institutional Investors," the appetite for real estate among institutional investors continues to be strong, with recent research indicating that real estate remains the largest block of alternative asset allocation for pension funds.

Prime property remains attractive to large institutional investors, with interesting opportunities also noted in regions such as Eastern Europe.

With this renewed appetite, State Street’s research found that investors have become more demanding of real estate managers and are insisting on more accountability.

Investors want closer relationships with their fund managers and are requesting increased information both at the outset and during the lifecycle of the fund.

The research also reveals that investors are seeking increased transparency on underlying investments and fees.

According to State Street’s research, the typical length of time between invitation and closing has nearly doubled since 2007 as investors take longer to make a final decision and pay greater attention to due diligence.

The study finds real estate investors are seeking to play an active role demanding independence on the boards and representation on investment committees of the funds in which they participate, reflecting a greater focus on risk management.

According to the research, large fund managers may meet these further demands by scaling up internally, but other fund managers may decide that they cannot afford to operate in these new conditions and opt to outsource to a professional service provider to meet investors’ increasing demands.