An annual global survey of institutional real estate investors has highlighted an over-allocation to the asset class among European investors and a widespread shift towards higher-return investment strategies.
The Investment Intentions Survey, carried out by three regional real estate associations ANREV, INREV and PREA showed that the gap between current and target allocations has narrowed even further after shrinking notably the year before.
After decreasing from 120bps in the 2022 report to 20bps in 2023, the gap has declined to 16bps in this year’s report. The current average allocation to real estate globally is 10.6%, just slightly above the average target allocation of 10.4%.
The reduction is observed for all regions, but there are important differences: European investors are on average over-allocated to real estate, while Asia-Pacific investors still have significant headroom, with an average exposure of 7.1% versus a target allocation of 8.4%.
Asia-Pacific association ANREV said a greater proportion of Asia-Pacific investors (41%) expected to increase their real estate allocations compared to their peers in Europe (16%) and North America (26%).
European association INREV said the gap decrease between the current and target allocations was driven mainly by external conditions, such as monetary policy or the denominator effect. Interest rates and inflation were highlighted by respondents to be the main issues impacting their real estate decisions for 2024, at 93% and 81% respectively.
Sentiment seems to have shifted this year in favour of higher-risk value-added and opportunistic strategies when investing in Europe, at 56% and 23%, respectively.
INREV said this mirrored a similar pattern observed in the aftermath of the global financial crisis more than 10 years ago, “where a pivot toward value-added and opportunistic strategies yielded substantial returns”.
Similarly, 63% of investors said they preferred a value-added style for investment in Asia-Pacific this year, the highest level since 2014. The interest for value-added strategies appears to be drawing capital away from core strategies.
INREV said that, although the diversification benefits for multi-asset portfolio remained the most important reason for investing in real estate, the potential for enhanced returns from the asset class had become more relevant for investors.
Non-listed real estate debt vehicles have also gained importance: more than 60% of respondents plan to increase their allocation to debt vehicles in 2024.
In Europe, the UK and Germany were identified as the preferred destinations for investors, followed by France and The Netherlands, while Japan was the most favoured market in Asia-Pacific.
In Europe, residential, industrial/logistics and office remain the preferred sectors in Europe. Although office remains in the top three preferred sectors, there is a sharp drop compared with last year’s results.
The Japanese cities of Tokyo and Osaka attracted the largest shares of investment intentions in Asia-Pacific, at 85% and 70%, respectively, although Osaka was tied with Sydney in Australia, and Melbourne came fourth.
The survey also revealed a shift towards industrial/logistics and the residential sector in Asia-Pacific, the two most preferred sectors at 93% and 85%, respectively.
Iryna Pylypchuk, INREV’s director of research and market information, said: ”The 2024 Investment Intentions Survey has highlighted the difficulties investors are facing as they look for returns in a higher-interest and high uncertainty market environment. However, it is at times of uncertainty that first-mover advantage is rewarded, giving room to be optimistic for cash-rich investors.
“Despite many uncertainties prompting investors to adjust their allocations to real estate globally, as portfolios churn and investments mature, 85% of investors globally are expecting to deploy capital into real estate this year.
“We are entering a window of potential mispricing and repositioning opportunities, be it through a bottom-up asset selection by exploring market bifurcation, or through private-equity play as cash-deprived players struggle to service their debt.”
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