Few would expect private real estate to thrive on institutional investor scorecards after a year like 2023, which began with continued rapid interest rate hikes by most central banks and ended with some stabilization but no signs of rate cuts in sight. Meanwhile, property values plummeted in most global markets, the failure of several regional banks in the U.S. forced lenders to raise capital, and transaction volumes plummeted as buyers and sellers fled for safety.
This backdrop has thrust institutional confidence in private real estate into the spotlight: open-ended investment vehicles were shut down as investor redemption requests surged, new business was almost nonexistent as denominator effects left institutional portfolios unbalanced, and refinancing concerns came to the fore.
As 2024 begins, macroeconomic uncertainty is heightening, raising doubts about the value of real estate in institutional portfolios. But according to PERE's 2024 Investor Outlook Study, most investors maintain their interest in real estate even as sector and strategy preferences continue to shift. In fact, a significant percentage of investors are even more interested.
The PERE survey provides a detailed view of current and future markets by gathering insights into investors' asset allocations, investment trends and performance forecasts. It is a global survey that allows for cross-regional comparisons across asset classes, as reflected in the question set and respondents.
The question set is reviewed annually to reflect changes in market trends and sentiment. For this 2024 study, PERE's research and analytics team surveyed 117 private markets institutional investors, 44 of which have investments in private real estate. Field surveys will be conducted from September to October 2023, and survey participation is always anonymous.
Decline and fall
The price correction over the past 12 months has hit future earnings expectations, but investors are keen to weather the storm.
A year ago, 31% of respondents to PERE's 2023 Investor Survey expected real estate investment returns over the next 12 months to fall short of benchmarks. A year later, returns are proving to be worse than investors expected. In this year's survey, nearly half of investors, 48%, said real estate had underperformed over the past 12 months. That's up from just 14% a year ago and represents the largest percentage of investors expressing dissatisfaction with returns in recent years.
These survey results show the extent to which steep interest rate increases have eroded capital values throughout 2023. However, while the percentage of investors who expect real estate to remain sluggish over the next 12 months has increased slightly from last year, the market correction has not diminished appetite for the asset class. Conversely, 39% of investors intend to increase their capital investment in real estate over the next 12 months, while 35% expect to keep it the same and 27% plan to reduce their investment. Moreover, these figures represent a reversal of sentiment from a year ago, when 27% expected to increase their investment in the asset class and 35% to reduce their investment.
Despite forecast net capital inflows to managers, the majority of investors are maintaining their target allocation to real estate, with reported levels of over-allocation remaining unchanged from last year's survey at 21 percent, and a quarter of investors are under-allocated to real estate, a significantly lower figure in recent years.
Strategy Shuffle
Value-add and housing top the list of new capital injections
Real estate investment opportunities higher on the risk/reward spectrum remain popular among investors. But while 21% of respondents to last year's investor survey were considering increasing their capital investment in value-add strategies over the next 12 months, in PERE's 2024 survey, this percentage increased to 27%, the highest of any strategy. That said, value-add had the highest percentage of investors considering reducing their capital investment in a single strategy, at 19%.
Interest in real estate loans has cooled somewhat compared to last year but it remains one of the most popular strategies, with 23% of investors considering injecting fresh capital into their loans in the next 12 months and just 6% planning to reduce their investment levels.
A combination of falling asset values and rising vacancy rates in many jurisdictions has put the office sector in a bad mood among investors, with 41% of respondents planning to reduce their capital investment in office space over the next 12 months and just 2% planning to increase their investment, up from 50% and 7% respectively in last year's survey.
Conversely, residential is investors’ most favored sector, with a third of respondents planning to inject new capital into the asset class. Of this, multifamily remains the favored subsector for 65% of respondents, while demand for build-to-sale developments has increased by 9 percentage points compared to a year ago.
In alternative investments, the percentage of investors citing student accommodation as their preferred sector has doubled from 10% last year to 20%. Willingness to invest in hotels has also doubled from 5% to 12%. As a result, there has been a commensurate decline in willingness to invest in data centers and healthcare facilities.