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INSTITUTIONAL REAL ESTATE ALLOCATIONS MONITOR
Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates are pleased to present the findings of the tenth annual Institutional Real Estate Allocations Monitor (the “2022 Allocations Monitor”). The 2022 Allocations Monitor focuses on the role of real estate in institutional portfolios, and the impact of institutional allocation trends on the investment management industry. Launched in 2013, the Allocations Monitor is a comprehensive annual assessment of institutions’ allocations to, and objectives in, real estate investments. This report analyzes trends in institutional portfolios and allocations by region, type and size of institution.
The 2022 Allocations Monitor includes research collected on a blind basis from 173 institutional investors in 34 countries. The 2022 participants hold total assets under management (“AUM”) exceeding US$11.0 trillion and have portfolio investments in real estate totaling approximately US$1.1 trillion. Our survey consisted of 25 questions concerning portfolio allocations to the asset class, current and future investments in real estate, investor conviction, investment management trends and the role of various investment strategies and vehicles within the context of the real estate allocation (e.g., direct investments, joint ventures and private funds). We also included questions regarding historical and target returns as well as environmental, social and governance (“ESG”) policies.
Real Estate Allocations Monitor
KEY FINDINGS OF THE 2022 INSTITUTIONAL REAL ESTATE ALLOCATIONS MONITOR
Institutions continue to increase target allocations to real estate, which is expected to support liquidity and transaction volumes over the coming years. Average target allocations to real estate rose to 10.8% in 2022, up 10 bps from 2021, which is consistent with the rate of increase we have seen over the past four years. Average target allocations have increased approximately 190 bps since we began the survey in 2013.
Strong portfolio returns combined with the denominator effect are contributing to overallocation in institutional portfolios. The percentage of institutions reporting overallocation has more than tripled year-over-year, with 32.0% of institutions invested above their target allocations, compared to 8.7% in 2021. Concerns of overallocation, along with declining conviction, led to a significant slowdown in deployment pacing, beginning in the second quarter of 2022.
After under-performing in 2020, institutional portfolios delivered outsized returns in 2021, as operating fundamentals remained strong and valuations surged. Real estate portfolios generated an average investment return of 17.1% in 2021, representing a significant “bounce back” from 2020, when returns were reported at 5.9%. At 9.9%, trailing five-year portfolio returns continue to significantly outpace target annual returns of 8.2%.
Investor sentiment decreased year-over-year, with institutions taking a more cautious approach to investing. Decrease in conviction may be attributed to a range of risks that may impact the global economy, including high inflation, rising interest rates, and geopolitical tension. While today’s investment environment is challenging, institutions are anticipating that attractive buying opportunities will emerge over the next 12 to 24 months.
While the United States remains the preferred destination for international capital allocations, cross border investing has decelerated. Institutions reported a year-over-year decrease in cross border investing, as the current market environment makes foreign investments a riskier bet. In addition, with the strengthening of the US dollar, non-dollar denominated investors report the additional challenge of currency hedging when investing abroad.
While a select number of larger institutions continue to internalize portfolio management, the majority of institutions continue to rely on the expertise of third party managers. Institutions expect to allocate approximately 90% of future investments to third party managers. While industry-wide fundraising was down through 3Q 2022, approximately 74% of investors report that they are actively investing in closed-end funds (albeit down from 79% in 2021), while 32% report investing on a direct basis.
Institutions continue to favor higher return strategies and are anticipating an opportunity to take advantage of potential repricing and dislocation over the next several years. While appetite declined across the risk spectrum, value add and opportunistic strategies remain the most popular among institutional investors. US-based institutions continue to show the greatest appetite for risk. Core investments saw the greatest year-over-year decline in interest, contributing to growing net redemptions in open-end funds.
ESG continues to be a growing focus of investors globally, with more than 50% of institutions now reporting that they have implemented a formal ESG policy. Despite some political headlines, institutions appear steadfast in their prioritization of ESG as an important component of portfolio management. Australian, European and Canadian institutions continue to take the lead on ESG.
Real Estate Assets
Institutions with AUM
in excess of US$50bn
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