Institutional investors are continuing to increase target allocations to real estate despite the first decline in confidence among the segment in five years.
The tenth annual Institutional Real Estate Allocations Monitor by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate notes that “decreased conviction coupled with portfolio overallocation has resulted in a slowdown of deployment pacing,” but adds that institutions are expecting to increase allocations to real estate by 30 basis points to 11.1% next year.
The survey’s conviction index, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, declined from a ten-year high of 6.5 in 2021 to 6.0 in 2022, reflecting what analysts are calling a “cautious view” of the market.
Meanwhile, target allocations to real estate ticked up for the ninth straight year to 10.8% in 2022, signaling the potential for an additional $80 to $120 billion of capital allocations to CRE. Institutions are forecasting a further increase of 30 basis points in 2023, which would be the largest year-over-year increase in nearly a decade. Institutions in the Americas are expecting to increase allocations by 40 basis points, while those in the EMEA and APAC regions expect to increase allocations by 30 basis points and 20 basis points, respectively.
The report notes that the asset class’s track record as an outperformer continues to attract capital inflows, as many investors note they are expecting attractive buying opportunities to emerge over the next two years. Specifically, “investment pacing is expected to accelerate over the coming quarters, and investors are positioning themselves to capitalize on potential distress and dislocation resulting from current market volatility,” the report notes.
Public pensions have the highest target allocation to real estate at 12.6%, while insurance companies have the lowest target allocation at 5.9% (but are expected to increase to 6.5% in 2023). And institutions with less than $50 billion in AUM continue to allocate a larger percentage of their portfolios to real estate than those with an AUM of greater than $50 billion.
Twenty-eight percent of institutions report that they expect to increase target allocations over the next year, down from 33% in the prior year.
“While institutions have slowed their pace of deployment in the face of overallocation, it is likely they’ll be highly active in the next two years as compelling investment opportunities emerge following this period of uncertainty,” said Douglas Weill, Managing Partner at Hodes Weill & Associates. “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.”