When IPE Real Assets surveyed institutional investors about their real estate allocations in April this year, it became clear that a slowdown had started. Real estate had been one of the most favoured asset classes during a decade of low interest rates.
Nearly half (48%) of investors expected to invest or commit less capital over the coming 12 months relative to the previous 12 months – exactly double the proportion that said this the year before. Meanwhile, a quarter of investors had been forced to sell assets and a further 42% were prompted to pause new investments due to the ‘denominator effect’ of falling public markets, which caused investors’ weightings to private markets to increase.
Then, in early November, Hodes & Weill Associates and Cornell University published the results of their survey of institutional investors, finding that target allocations to real estate have plateaued globally for the first time in 10 years. What is more, European investors’ targets actually fell.
The majority of institutions were at or over their target allocations to real estate, with nearly 40% of survey respondents reporting overallocation to the asset class by an average of 200bps, in comparison with 32% of institutions in 2022 by an equal margin.
The shifts in investment appetite have obvious implications for the global real estate fund management industry that serves these investors, and which has ballooned over the past decade amid rising allocations.
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This year’s ranking of the top 150 real estate investment managers has indeed reflected the change in direction. For the first time in at past 10 years, the growth in aggregate assets under management (AUM) has not gone up but rather fallen into negative territory.
Most commentators attribute the decline in AUM to falling valuations in the underlying property markets, rather than, for example, redemptions or outflows from funds.
It is a small slip, at €22.3bn, representing less than 0.4% of the €5.9trn total, so it could prove to be a temporary plateau. But some expect AUMs to decline further. “I would expect to see further declines in AUM, because of the falling value, but also because investors are still overweight relative to their target weighting,” says Paul Jayasingha, global head of real assets asset manager research at Willis Towers Watson.
Paul Jayasingha: “I would expect to see further declines in AUM”
That said, not every firm has seen its AUM decline. Of the top 10, the two largest firms – Blackstone and Brookfield Asset Management – have bucked the trend, as have PIMCO and ESR.
And there are reasons for optimism. As we report, fundraising for opportunistic real estate could be a profitable avenue of growth for fund managers. Appetite is clearly there – Blackstone has raised more than $30bn for its global opportunities fund and Brookfield is currently in the market with its fifth opportunistic real estate fund with what is believed to be $15bn.
According to the latest Hodes Weill and Cornell University study, institutions expect to hold target allocations steady in 2024 but investors also believe the next few years will provide good vintages to capitalise on expected dislocation and distress. The survey’s ‘conviction index’, which measures institutions’ view of real estate from a risk-return perspective, increased from 6 to 6.4 – its second-highest level since the survey launched in 2013.
Douglas Weill, managing partner at Hodes Weill & Associates, said: “Despite short-to-medium-term macroeconomic disruption, investor conviction in the asset class remains near its high, and the asset class continues to play an important role in institutional portfolios alongside other alternative allocations, including private equity, private credit and venture capital. 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.”
Investors and fund managers will need to think carefully about how they allocate capital, however. And while an emphasis on sectors over geographies has been the trend in recent years, Oxford Economics has warned that this might need to change.
According to the consultancy, the shift to sector allocations “looks to have been the correct decision mostly, as structural themes supported more pronounced headwinds and tailwinds for various commercial real estate sectors relative to geographies”.
But Oxford Economics warns that the considerations between sector versus market selection are now becoming more balanced. “Major themes like deglobalisation, demographics, energy trends and monetary policy divergence will add more weight to geographic considerations,” it says in a recent note to investors. “But most of these trends have clear-cut considerations at a sectoral level as well. Effectively, the sector and geography considerations will need to be looked at more holistically as a pair, rather than as independent considerations.”