The Determinants of Institutional Capital Allocation to Real Estate
- Real Estate, Institutional Investors
Pension funds all over the world have experienced increasing allocations to alternative assets, the most important being real estate. The question is, however, what the drivers of that real estate allocation are. We exploit the global pension fund database of CEM to shed light on this issue. We find that pension funds’ strategic allocation (net of performance effects) to real estate is the result of the historic performance of the asset class compared to other asset classes, and that pension funds adjust their actual allocation percentage quickly to the strategic allocation: we find allocation reductions in years after high returns, and increases in years after low returns. Market risk attitudes – measured by the credit risk spread and the term spread – do not play a role in the overall real estate allocations. Last, we observe that while pension funds’ allocation to real estate has grown over time, this is not the case after we adjust for capital appreciation: In terms of physical real estate assets, pension funds’ portfolios are generally shrinking, with the US leading the way.