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According to the annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University's Baker Program in Real Estate, institutions have chosen to spend 2023 focused on managing their existing portfolios in an environment in which investors are waiting for valuations to find a bottom.

While the survey finds that institutions expect to hold target allocations steady in 2024, investors believe the next few years will prove to be good vintage years to capitalize on expected dislocation and distress.

The majority of institutions are at or over target allocations to real estate, with nearly 40% of survey respondents reporting overallocation to the asset class by an average of 200 basis points, in comparison to 32% of institutions in 2022 by an equal margin. However, while the denominator effect has been in play since early 2022, there are signs it is beginning to abate, bringing portfolios back into balance.

"This can be attributed to a rebound in public equities from a low in September 2022 combined with write-downs of private real estate portfolios," it added.

The survey notes that there are early signs that institutional portfolios have been trending towards allocation targets over the last several quarters, with institutions responding to the survey after September 1st reporting being under-allocated by an average of 70 basis points.

In 2022, institutions saw real estate portfolio returns moderate to 9.5%, following an exceptionally strong performance in 2021 when institutions reported the highest returns generated over the past decade, at 17.1%. This return is consistent with historical averages and is 100 basis points above institutions' average target return of 8.5%. Survey respondents expect further declines, and potentially negative returns, in 2023 as portfolios continue to take write-downs.

Institutions in the Americas expect to hold target allocations flat over the next 12 months, and EMEA-based institutions, with the highest target allocation at 11.5%, indicated an intention to lower target allocations by 20 basis points.

A substantial portion of this decline is out of Europe, where nearly 20% of institutions report an intention to lower target allocations. The APAC region was the only one to report an anticipated increase, with target allocations expected to rise 50 basis points from 9.5% in 2023 to 10.0% in 2024.

The United States remains the preferred destination for capital allocations from both North American and international investors, with 89% of institutions reporting they are actively investing in the region, followed by 73% in Continental Europe, 65% in the United Kingdom, and 41% in Asia.

175 institutions from 25 countries participated in this year's survey, representing aggregate AUM exceeding US$10.2 trillion and portfolio investments in real estate totaling approximately US$1.1 trillion.