According to the 2023 Institutional Real Estate Allocation Monitor, published by advisory firms Hodes, Weil & Associates and the Cornell Baker Program in Real Estate, institutional investors are increasing their real estate allocation despite facing the prospect of negative returns. is firmly maintained.
Institutional investors expect returns on real estate portfolios to continue to decline significantly and potentially become negative as a result of further writedowns on private portfolios.
According to the report, the National Council of Real Estate Investment Fiduciaries’ Core Return Diversified Core Equity Index produced negative returns from the fourth quarter of 2022 to the second quarter of this year, equivalent to a cumulative depreciation rate of 12.4%.
This is also the longest period of consecutive negative returns since the fourth quarter of 2009, when the market was in the midst of the global financial crisis.
The outlook for negative returns follows strong annual real estate returns from institutional investors in recent years. Returns in 2021 averaged 17.1%, the best annual performance in a decade. According to the study, the average return on financial institutions’ real estate portfolios in 2022 was 9.5%, in line with historical returns and the second highest level in the past 10 years.
Despite the recent decline, institutional investors have not reduced their allocations to real estate, keeping them flat year-over-year, the survey found. Financial institutions maintained an average target allocation rate of 10.8% from 2022 to 2023, but this is the first time since the survey began in 2013 that financial institutions have not reported an increase in their target allocation amount to the real estate sector. become.
Despite the CRE disruption, investors continue to support value-add strategies. More than 25% of institutions expect to invest more capital in opportunistic and value-add strategies, and approximately 10% plan to invest in core and core-plus strategies. The United States remains the preferred destination for real estate investment around the world.
The study collected data from 175 international institutional investors with approximately $10.2 trillion in assets under management, of which real estate holdings accounted for approximately $1.1 trillion.