While capital deployment to real estate has slowed, institutional target allocations to it are growing, a Cornell University and Hodes Weill & Associates study found.
The study found that the slowdown in capital deployment comes from overallocation and decreased conviction, or consistency, in outperforming benchmarks.
The results come from the 2022 Institutional Real Estate Allocations Monitor, featuring 173 institutions from 34 countries representing aggregate assets under management of $11.1 trillion and portfolio investments in real estate of roughly $1.1 trillion.
Among its key findings, it said portfolio returns combined with the denominator effect contributed to an overallocation in institutional portfolios. Roughly 32% of institutions reported investing more than their target allocations, compared with about 8.7% last year.
After poor returns of 5.9% in 2020, institutional real estate portfolios generated an average return of 17.1% in 2021. Target allocations to real estate rose to 10.8% in 2022, an increase of 10 basis points from a year prior.
Real estate portfolios benefited from strong performance with high returns and rising valuations, leading to an increase in portfolio values for the asset class, said Douglas M. Weill, managing partner of Hodes Weill in an email.
The study found that investor sentiment and the decrease in outperforming benchmarks over the past year has made institutions take a more conservative approach to spending. It notes that this is likely the result of global headwinds such as inflation, interest rate hikes and geopolitical tension. However, Mr. Weill sees attractive buying opportunities for institutions over the next 12 to 14 months.
“Investors are turning their attention to potential distress and dislocation that may result from the expected repricing in the market,” he said. “This includes rescue financing opportunities that are beginning to arise as property owners struggle to meet debt maturity obligations. In addition to credit, institutions are also looking to invest in public REIT and debt securities.”
The study also found that institutions expect to allocate roughly 90% of their future investments to external managers.
“Except for the very largest institutions, it is not economically practical for most institutions to build internal capabilities,” Mr. Weill said.
The U.S. retains a strong position, having the strongest geographic focus across all institutions at 86% of all institutions surveyed allocating to the region in 2022. But across the board, international allocations have dropped year-to-year.
“Longer term, we would expect the globalization of the institutional real estate capital markets to continue,” Mr. Weill said. ” But in the near term, institutions are prioritizing investments in their home markets.”
