Institutions Reorganise Real Estate Allocations
Many organisations opt to maintain rather than increase their commercial real estate (CRE) allocation targets.– There was no change in allocations for 59% of respondents, a rise for 23%, and a decline for 18%, according to the 2023 WMRE Institutional Investor Survey.– This differs from the last poll, which found that 48% had increased their allocations.– Institutions are restrained from making further increases because they have reached or beyond their present allocation targets.– Overallocation in institutional portfolios results from 2022's strong returns in the real estate market. Allocations to funds and transactions slowed because of the dismal performance of alternative assets in 2022.
Institutions that have been gradually raising their goal allocations to commercial real estate (CRE) in recent years are opting to keep such allocations steady, according to a WMRE Institutional Investor Survey survey. As a result of the increased interest rate environment, investors are refocusing their efforts on rebalancing their portfolios and waiting for prices to reset.
No change in CRE allocations was reported by 59% of respondents, an increase recorded by 23%, and a decrease reported by 18%. Compared to last year's poll, in which 48% of respondents reported increased allocations, this is a dramatic shift. Institutional investors were predicted to allocate 13% of their portfolios to real estate.
Many institutions have already met or exceeded their present allocation targets, which is one of the critical reasons for the reluctance to increase allocations. Overallocation in institutional portfolios can be attributed to the denominator effect and the strong returns from real estate portfolios in 2022. In 2022, according to the Institutional Real Estate Allocations Monitor, 32.0% of institutions were above their goal allocations, up from 8.7% in 2021.
Hodes Weill & Associates' co-managing partner and founder Doug Weill remarked on this trend, "That result has followed a steady climb for ten years in target allocations and is the first time we have seen actual allocations exceed target allocations." He believes the underperformance of public stocks and fixed income in 2022 is to blame for this change, as both asset classes experienced negative returns that year. Allocations to funds and transactions slowed due to institutional portfolios becoming mainly overallocated.
Several institutions are reevaluating their real estate investments in light of fluctuating property values. They wait for the market to adjust to higher interest rates before allocating more. The volatile market conditions necessitate careful portfolio management from institutions, and this strategy reflects that.
While institutional investors may be suspending their CRE allocations for the time being, this poll shows that real estate continues to be a desirable asset class. Despite the current concerns, institutions continue to perceive the long-term potential and value of investing in commercial real estate.
Despite the increased interest rate environment, many institutions are deciding to keep their current CRE allocations while rebalancing their portfolios and await a price reset. Slower allocations and fewer transactions have resulted from institutional portfolios being over-allocated and other asset classes performing poorly. Institutions, recognising the continued investment worth of real estate, will likely resume allocating more funds to the sector once valuations stabilise.