Institutional investors are set to increase their real estate allocation targets by 30 basis points to 11.1% over the next year.
The 10th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate, has concluded that allocations will rise as institutions take advantage of opportunities.
This is despite the fact that economic turmoil, geopolitical risk, rising inflation and interest rates have contributed to the first decline in institutional investor confidence in real estate in five years, it said.
Confidence, expressed as a “Conviction Index”, has declined from a 10-year high of 6.5 in 2021 to 6.0 in 2022.
However, real estate has continued to outperform target expectations in institutional portfolios. On a trailing five-year basis, institutions have seen an average annual return of 9.9%, significantly ahead of the average target return benchmark of 8.2%.
Covid-induced underperformance in 2020 was swiftly corrected by an outsized average annual return of 17.1%, which in turn contributed to a tripling in the number of institutions reporting overallocation to real estate. Approximately 32% of institutions report being invested above their target allocations.
Douglas Weill, managing partner at Hodes Weill, said: “While institutions have slowed their pace of deployment in the face of overallocation, it is likely they will be highly active in the next two years as compelling investment opportunities emerge following this period of uncertainty.”
He added: “If market volatility leads to distress and dislocation, the next several years may prove to be good vintage years for capital deployment. There are already signs of institutional capital returning to the market to take advantage of distress, with several pensions and sovereign wealth funds actively investing in public REITs and debt securities, and deploying capital into credit strategies.”
Target allocations to real estate increased for the ninth straight year to 10.8% in 2022 – up 10 basis points from 2021 and consistent with the annual rate of growth over the last four years. This increase in target allocations implies the potential for an additional $80bn to $120bn of capital allocations to real estate in the coming years.
Institutions are forecasting a further increase of 30 basis points in 2023, which would be the largest year-over-year increase since 2014.
The bad news is that institutions universally expressed declining interest in the UK, with 53% of investors reporting actively allocating to the region, down from 61% in 2021.
Higher-return strategies remain in favour, with 84% of institutions actively allocating to value-add and/or opportunistic strategies in anticipation of pricing dislocation.
ESG continues to be a growing focus of investors globally, with 56% of institutions now reporting that they have implemented a formal ESG policy, up from 50% in 2021 and 32% in 2016.
All Australia-based institutions report having ESG policies in place that influence investment decisions, followed by Europeans at 81% and Canadians at 80%. At 25%, the US continues to lag behind its peers in adopting ESG policies.
More than 170 institutions from 34 countries participated in the survey, representing real estate investments of $1.1tn.
The full report can be downloaded from the Hodes Weill & Associates website.
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