Institutions Come for the Rates, Stay for the Returns

NEW YORK CITY—A low interest rate environment is a decided plus for commercial real estate when it comes to institutional investors' allocation decisions. Nearly half, or 47%, of 201 executives surveyed by BlackRock said that low interest rates influence their investments in real assets, including real estate, infrastructure and commodities. However, an even higher percentage—63%—rank “increasing returns” among the three most important factors in their decisions.

The survey was conducted by the Economist Intelligence Unit in September on a commission from BlackRock. It found that 46% of respondents had increased allocations to real estate, infrastructure, commodities, timber and farmland in the past three years, while 60% said they expect to do so over the next 18 months.

Of the three basic asset classes that comprise real assets, real estate is far and away the biggest draw for institutions, judging from the BlackRock survey. Ninety-six percent of respondents have invested in real estate, with 59% taking a conservative approach via core equity. That being the case, the potential of higher returns has led 47% of investors to increase their allocations to value-added equity and 34% to opportunistic equity strategies.

However, while investors may be somewhat more apt to wade into riskier waters, the threat of a rip current in the form of higher interest rates would send most of them closer to shore. Sixty-two percent of the respondents to BlackRock's survey said they would rethink some of their allocations to real assets in the event of a “significant” rise in interest rates. Real estate investments appear to be the most vulnerable to these concerns: 59% of respondents believed their real estate to be most sensitive to rising rates, compared with 41% and 33% concerned about infrastructure and commodities exposure, respectively.

“According to the survey results, the main draw of real assets generally, and property in particular, has been the ability to provide a stable income in this ultra-low yield environment,” says Marcus Sperber, global head of BlackRock Real Estate. “Investors are becoming increasingly concerned about the impact of central bank policies and the subsequent impact on interest rates on property markets. This is leading the majority of respondents to say that a significant rise in interest rates would cause them to rethink some of their allocations to real assets.”

Sperber, adds, though, that “one of BlackRock's key 2015 themes is that nominal risk-free rates should stay low for longer. Even if central banks tighten monetary policy, we would anticipate property to continue to provide a good protection against inflation, as these actions should be accompanied by strong economic growth and improving employment rates all of which are supportive of real asset fundamentals.”

Although infrastructure is less mature than some other real assets covered in the survey, it's also faster-growing, with 66% of respondents owning assets in this class. Seventy-two percent of survey respondents said they're considering additional equity investments, while 38% have their eye on the newly emerging opportunity of institutional infrastructure debt. Of those that expect to increase allocations, 51% have at least some interest in brownfield projects, compared to 23% that are interested in “greenfield” opportunities.

Geographically speaking, 80 respondents were located in North America with an equal number in Europe, the Middle East and Africa, while the remaining 41 were based in the Asia-Pacific region. Approximately one-third of the organizations represented in the survey have assets under management of more than $75 billion, with a similar proportion reporting between $1 billion and $5 billion.