Muted outlook for investment in the global real estate industry

Almost one quarter of all investors plan to decrease their allocations to real estate globally between 2023 and 2024, reflecting uncertainty surrounding investment decisions across every asset class. This decline is only just offset by the 27% of investors globally that are planning to increase allocations over the same period, revealing a muted outlook for the industry. The findings were published today in the 2023 Investment Intentions Survey by ANREV and INREV, the associations for investors in non-listed real estate vehicles in Asia and Europe respectively, and the Pension Real Estate Association. European investors emerge as the most cautious, with 37% planning to decrease allocations during the period – compared with 20% and 5% for their North American and Asian Pacific peers. However, the current average allocation to real estate globally is 10.2%, only slightly below the average target allocation of 10.4%. The equivalent gaps narrowed significantly for European and North American investors because other asset classes fell further than real estate during 2022. This effect has increased current allocations and some investors – particularly in Europe – could be technically over-allocated to real estate. The current drop in investor sentiment is sharper than during the Covid-19 crisis, the report found. However, the near-term allocation outlook reflects the fact that, as a private market, non-listed real estate lags other asset classes in terms of the speed and degree of repricing. Return to core The prevailing mood of caution has prompted a return to core. European investors are once again the most risk averse, with 57% opting for core when investing in their region. They also have the lowest preference for opportunistic strategies at just 8%. In Europe, the shift to core resembles the pattern seen in 2008 and 2009 – albeit, less sharp. Conversely, Asian Pacific investors targeting Europe reported a substantial increase in preference for opportunistic strategies, perhaps looking to increase their European portfolios at a discount. Rise of non-listed debt Looking at Europe on an equally weighted basis, almost all access routes into real estate are expected to see an increase in allocations, with the exception of listed real estate and derivatives. Non-listed real estate debt takes the top spot, with a 62% net increase position. With all investors looking for less risky strategies, a big focus on senior debt is expected. Joint ventures follow, with a 39% net increase position, while directly held real estate, separate accounts, and non-listed real estate funds stand at around 30% net increase. Weighted by investors’ real estate assets under management, preference for non-listed real estate debt jumps to over 75%. Conversely, non-listed real estate funds and joint ventures slip into net negative territory at -16% and -6%, respectively. More defensive strategies The search for lower risk is also reflected in investors’ geographic and sectoral preferences. Top picks for European investors are Germany (50%), Netherlands (44%), France and the UK (both 39%). Office, residential and industrial/logistics remain the preferred sectors for all investors targeting Europe but targets sit below their seven-year averages. Offices took the top spot at almost 70%, partially explained by non-European – and Asian Pacific investors in particular – identifying it as the sector of choice when accessing Europe. Residential maintains its second-place position, followed by last year’s top spot holder, industrial/logistics. For European investors, sector preferences line up slightly differently with industrial/logistics and residential in joint first place (both at 67%), followed by offices (50%). Complex mix of issues Investors across all regions identify inflation, interest rate policy and geopolitical risk as having the biggest impact on investment decision making. However, there are strong differences of opinion when it comes to assessing the importance of ESG factors. Over 90% of European investors say that a fund’s commitment to net zero carbon is a key consideration in real estate investment decisions, compared to nearly 70% of their peers in Asia Pacific and 0% of those in North America. Inflation hedging The diversification benefits of real estate continue to be a principal driver for allocating to the asset class. However, the survey has also seen a significant rise in the importance placed on real estate for inflation hedging over the last two years. With inflation having been low for many years, investors seemed to have largely discounted inflation risk – something that has changed rapidly over the course of 2022. INREV director of research and market Information Iryna Pylypchuk said: “The 2023 Investment Intentions Survey paints a clear picture of the difficult operating environment that investors are continuing to navigate. “The higher for longer interest rate environment almost demands revisiting and reinstating the case for non-listed real estate as an asset class. However, despite the muted short-term outlook, the income return, partial inflation hedge, and long hold qualities of the asset class will continue to support high level allocations for investors able to circumvent technical allocation breaches. “The move towards ESG and non-listed real estate debt are now being supercharged by regulation and/or the need to service the market. So, despite the headwinds, European non-listed real estate looks to be progressing to a fundamentally more resilient, futureproof, and increasingly diverse investment proposition. “What’s more, the cautious approach being adopted by European investors is a clear sign that market participants are realistic and preparing to embrace the challenges on the horizon.” To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews Image © Simone Brandt/imageBROKER/Shutterstock