NEW YORK--(BUSINESS WIRE)--After remaining flat for two consecutive years, institutional target allocations are expected to decrease in 2025, finds the 12th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate. Target allocations held at 10.8% in 2024, with institutions expecting to lower targets by an average of 10 basis points next year in favor of other allocations including private credit and infrastructure.
To download the full report, which was published today, please visit: www.hodesweill.com/research.
Following an eight-year period when institutions were under-allocated to real estate by an average margin of approximately 100 bps, institutions faced over-allocation issues in 2023 as roughly 39% of institutions reported being over-allocated. The continued strong performance of public equities, which achieved multiple highs over the past 12 months, coupled with further write-downs in real estate portfolios from 2022 peaks, has resulted in a significant shift in allocations year-over-year. Approximately 50% of institutions report under-allocation to the asset class this year and on average institutions are under-allocated by 60 bps.
Institutional real estate portfolios delivered an average return of -1.4% in 2023, following a 10-year period of substantial outperformance relative to target returns. Investors expect that negative quarterly returns in their portfolios may persist over the near-term as portfolios are marked to market, but believe the continuation of interest rate cuts and favorable operating fundamentals will help performance return to positive levels. Real estate returns have outperformed institutions’ long-term target return of 8.3% on both a 3-year and 10-year basis.
The “Conviction Index” in this year’s survey, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, is down slightly year-over-year at 6.3 (compared to 6.4 in 2023). Institutions have remained largely on the sidelines over the past 12-24 months, as reflected by cyclical low allocations to closed-end funds, pointing to concerns regarding inflation, high interest rates, low transaction volumes and uncertainty as to the direction of the economy. As transaction volumes rebound, institutions report that they are gaining conviction about a market bottom and the opportunity to allocate capital to new investments.
Douglas Weill, Managing Partner at Hodes Weill & Associates, said, “Despite persistent challenges in the market, commercial property price index data suggest that real estate valuation metrics have bottomed – and in some cases, they’re showing signs of rebounding. While negative returns have materialized as expected and will likely continue as institutional portfolios are marked to market, broader macro trends including continued interest rate cuts and signs of decelerating rates of inflation are driving transaction activity, which should help to stabilize valuations. These observations are reflected in the optimism we’ve noted among institutions, who despite being under-allocated have largely been waiting for a market bottom before making additional capital allocation decisions. As transaction volumes grow, we expect to see allocations start to accelerate in response.”
Institutions in the Americas report the highest target allocation to real estate at 11.0%, followed by APAC-based institutions at 10.9% and EMEA-based institutions at 10.4%. Looking to 2025, institutions in the Americas and EMEA noted plans to reduce allocations by 10 basis points each, and APAC-based institutions intend to raise target allocations by 20 basis points. On average, approximately 70% of institutions expect to hold their target allocations flat over the next 12 months, while 13% expect to increase targets and 17% expect to decrease targets. Private and public pensions continue to have the highest target allocations to real estate, followed by endowments and foundations, with insurance companies reporting the lowest target allocation at 6.7%.
While North America remains the preferred destination for capital allocations with 87% of institutions reporting intent to allocate capital to the region over the next 12 months, appetite for investing cross-border has decreased across all regions. Institutions based in APAC continue to be the most active cross-border allocators, with 80% of institutions in the region looking to invest outside of their domestic markets in 2025, compared to 75% and 65% of institutions from EMEA and the Americas, respectively. While North America remains an important investment market for APAC investors, appetite seems to have shifted towards domestic investing. Approximately 65% of APAC-based institutions plan to invest capital in North America in 2024, down from 91% in 2023, while 70% of investors in the region plan to invest in Asia, up from 55% in 2023.
Fundraising for private real estate investment strategies remained slow through the first nine months of the year. Though the amount of investors planning to invest in closed-end private real estate funds remained at 80%, institutions highlighted a shift in preference toward direct investments, joint ventures and separate accounts, which can offer greater control and tailored investment strategies. Appetite for open-end funds decreased slightly year-over-year, from 56% to 53%, as institutions contend with unfulfilled redemption requests.
Institutions were more active allocating capital to REITs in 2023, as investors looked to capitalize on discrepancies between public and private market valuations. Approximately 39% of institutions actively invested in REITs in 2023. While reasons for investing in REITs vary by type of institution, approximately 67% of institutions cited liquidity as the primary consideration for investing.
As return expectations have risen, driven by appetite to take advantage of market distress and dislocation, institutions in the Americas and APAC report favoring higher-return strategies, including value-add and opportunistic, while interest in core strategies remains high in EMEA. Value-add was cited as the most favored strategy in 2024, with 79% of institutions reporting that they are actively allocating capital to value-add investments, followed by opportunistic at 73% and core at 62%. Regionally, institutions in the Americas show the greatest preference for opportunistic strategies at 81%, compared to 67% in APAC and 53% in EMEA. Appetite for credit opportunities continued to increase over the last 12 months, with 63% of institutions noting that they are actively allocating capital to debt strategies, up from 56% in 2023 and 44% in 2022.
Matt Hershey, Partner at Hodes Weill & Associates (Europe), said, “Among the global regions, European and Middle East-based investors are showing the highest conviction for new investments. We believe this can be attributed to strong property market fundamentals with an increasingly clear capital markets picture going forward. This is despite the fact that EMEA-based institutions experienced the most challenging performance in 2023 with a -2.5% return, 110 bps below the global average. Overall, these institutions report that they are optimistic about achieving their target return of 7.0% in 2024, with a clear preference for core investments over the next cycle.”
Consistent with findings in recent years, nearly two-thirds of institutions report outsourcing their entire real estate portfolio to third-party managers. Overall, 93% of institutions report outsourcing all or a portion of their portfolio to third-party managers, while 7% report managing their entire real estate allocation in-house. Approximately 16% of institutions anticipate decreasing the number of managers in their portfolios in the near term, up from 8% in 2022. Against the backdrop of a highly competitive fundraising market, institutions are favoring managers with proven track records over multiple cycles and demonstrated sell-discipline. In addition to internal rates of return (IRRs) and estimated multiples on invested capital (MOICs), distributions to paid-in capital (DPIs) is an increasingly important metric for institutions evaluating potential managers.
This year, the percentage of institutions with formal ESG policies remained flat at 58%. However, this number has grown significantly from 36% in 2017. European and Australian institutions continue to lead the market in terms of implementing policies, with 75% of Australian institutions and 74% of European institutions reporting that their investment process is influenced by their ESG policies. While the U.S. continues to lag its peers in policy implementation, with 23% of institutions reporting that their policies influence their investment decisions, ESG policies in the U.S. are advancing in terms of social and diversity directives, with specific mandates to invest with minority- or women-owned managers.
186 institutions from 25 countries participated in this year’s survey, representing aggregate AUM exceeding US$13.6 trillion and portfolio investments in real estate totaling approximately US$1.4 trillion.
About Hodes Weill
Hodes Weill & Associates is a leading, global capital advisory firm focused on real estate, infrastructure and other real assets. The firm has offices in New York, Denver, Hong Kong, London, Amsterdam and Tokyo. Founded in 2009, Hodes Weill provides institutional capital raising for funds, transactions, co-investments and separate accounts; M&A, strategic and restructuring advisory services; and fairness and valuation analyses. Clients include investment and fund managers, institutional investors, lenders, and public and private owners of assets and portfolio companies. For more information, please contact or visit www.hodesweill.com
*All U.S. regulated capital market and securities advisory services are provided by Hodes Weill Securities, LLC, a registered broker-dealer with the SEC, and a member of FINRA and SIPC, and internationally, by non-U.S. Hodes Weill affiliates.
About Cornell University’s Baker Program in Real Estate
Cornell’s Baker Program in Real Estate housed in the Paul Rubacha Department of Real Estate offers a comprehensive, professional, graduate-level curriculum that educates the next generation of real estate industry leaders, taught by the largest on-campus real estate field faculty in the country.
Cornell is also home to the Cornell Real Estate Council, an extensive network of industry leaders, the Cornell Real Estate Review, conferences, research and industry news, and more.
For more information, please visit https://realestate.cornell.edu/programs/baker/
Disclaimer
For informational purposes only. This is not a solicitation to buy or sell any securities or securities products. Please refer to the full report for important disclaimers. The full report can be found at www.hodesweill.com/research