Evening Brief – 11.01.23
RE Allocations Flat, 1st Time in 10 Years
Institutional target allocations to real estate have remained flat for the first time in 10 years, at 10.8%, according to the 11th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate.
While institutions anticipate maintaining target allocations in 2024, investors believe the next few years will be strong vintage years to benefit on expected dislocation and distress.
Most institutions are at or above target allocations, with nearly 40% of respondents reporting an average 200 basis point overallocation, compared with 32% of institutions in 2022 by an identical margin.
The survey observes that there is early evidence that institutional portfolios have been drifting towards allocation targets over the last several quarters, with institutions reporting under-allocation by an average of 70 basis points.
The “Conviction Index”, which assesses institutions’ risk-return perceptions, increased to 6.4 from 6.0, the second-highest level since the survey began in 2013.
After a long period of sitting on the fence, investors are beginning to deploy capital to select opportunities, though they remain cautious, citing concerns about interest rates remaining higher for longer, as well as uncertainty about the economy.
Real estate portfolio returns moderated to 9.5% in 2022, following a strong performance in 2021, when institutions reported the highest returns earned over the previous decade, at 17.1%.
According to the research, this return is consistent with historical trends and is 100 basis points higher than institutions’ average goal return of 8.5%. As portfolios continue to take write-downs, survey respondents anticipate additional reductions and perhaps negative returns in 2023.
“While target allocations are flat year-over-year, this follows 10 years of increases totaling 190 basis points, which represents an increase of over 20%,” said Douglas Weill, managing partner at Hodes Weill & Associates. “From a macro perspective, the looming wall of debt maturities may be the catalyst for valuations to find a bottom, encouraging investors to return from the sidelines.”
The U.S. continues to be the favored destination for capital allocations, with 89% of institutions reporting active investment in the region. Despite a difficult fundraising environment that has continued since 2022, more than 80% of institutions say they are actively contemplating fund investments.
Higher-return strategies continue to be the focus of risk preference, with more than 25% of institutions expected to invest more in both opportunistic and value-add strategies.
Investors’ appetite for credit strategies is also growing, with 34% of survey respondents wanting to allocate more money in real estate debt, up from 14% in 2022.