Investor sentiment towards real estate has declined for the first time in five years as persistent inflation, rising interest rates and heightened geopolitical tensions continue to threaten the global economy.
Thirty-two percent of institutional investors are over-allocated to real estate in 2022, a more than triple increase from last year, according to the latest annual report from the Institutional Real Estate Allocations Monitor, published by Hodes Weill. & Associates and Cornell University’s Baker Program in Real Estate. Over-allocation to private assets has been common this year as public market corrections have yet to be reflected in private market investor valuations.
In the first three quarters of 2022, real estate funds raised a total of $107 billion, the slowest pace of fundraising from the first to the third quarter since 2013.
The finding was based on a survey of 173 institutional investors with a total of $1.1 trillion invested in real estate assets. Most survey respondents are public and private pension plans, endowments and foundations. The survey was conducted between May and October.
The slowdown in cross-border transactions also indicates that investors are taking a more cautious approach to real estate investing, according to Douglas Weill, founder and co-manager of Hodes Weill & Associates. In North America, 57% of real estate investors are investing outside their home region in 2022, up from 63% in 2021, according to the report. “Real estate markets have become very global in nature over the past 10 to 15 years,” Weill said. II in an interview. “[But] we anticipate cross-border capital flows [to] be at a lower level for the foreseeable future.
Despite the difficult environment, however, the prospect of investing in real estate is not dire. Even amid over-allocation concerns and declining investor sentiment, real estate assets continue to serve as an inflation hedge and are expected to outperform other alternative assets, such as private equity. The asset class has also shown that it can generate high returns on investment over the long term, with an average gain of 9.9% over five years, according to the report. Studies have also shown that the best real estate returns tend to follow periods of recession.
Investors who are optimistic about commercial real estate can create good investment opportunities.
“While institutions have slowed their pace of deployment in the face of over-allocation, they are likely to be very active over the next two years as attractive investment opportunities emerge after this period of uncertainty,” said Weill. “If market volatility leads to distress and dislocation, the next few years could prove to be good years for capital deployment.”
According to the report, average target allocations to real estate rose to 10.8% in 2022, up 10 basis points from last year. Target allocations to the asset class have increased steadily since 2013 and are expected to reach 11.1% next year. The most notable target allocation increase comes from Louisiana’s teachers’ retirement system, which adjusted its target allocation to real estate from 10% in 2021 to 15% in 2022, according to the report.
“There are already signs of institutional capital returning to the market to take advantage of the distress, with several pension funds and sovereign wealth funds actively investing in public REITs and debt securities, and deploying capital in credit strategies. “, Weill said.