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Investors adjust allocations to real estate globally as market uncertainty continues

17 January 2024, Amsterdam – With ongoing macroeconomic uncertainty impacting the global real estate market in 2023, investor appetite for the asset class has slowed, with the gap between average current allocations and target allocations across Europe, Asia Pacific and North America, decreasing for the third year running. 

According to the 2024 Investment Intentions Survey – published today by ANREV, INREV and PREA – on a weighted AUM basis, the current average allocation to real estate globally is 10.6%, just slightly above the average target allocation of 10.4%. The slight overallocation is largely due to European investors who have an average allocation of 10.5%, which is 67 basis points (bps) above the average target.   

European bears and Asian bulls 
European investors are the most bearish on expected allocations, with a substantial 43% expecting a decrease in allocations and only 16% expecting an increase. Investors from Asia Pacific are the most bullish with diverse cross-regional investment plans, 41% of Asia Pacific investors expect allocations to increase, while 0% expect a decrease.  

Investors shift to higher-risk strategies
The shift towards core strategies reported last year has seen a sudden reversal. In fact, over three quarters (78%) of investors looking to deploy capital in Europe in 2024 are seeking higher-risk strategies, with the majority (55%) preferring value added strategies. In contrast, only 21% of investors chose core as a preferred strategy – this being the lowest share recorded since 2008.  

This echoes the search for value added strategies in the aftermath of the global financial crisis of 2008, where higher-risk strategies yielded substantial returns. While the underlying causes of the current downturn are entirely different, early equity-rich movers may be identifying investment opportunities, anticipating a window to tap into a higher return potential. 

Despite showing increasing preference towards non-core strategies – rising from 43% in 2023 to 64% this year – European investors remain the most risk-averse.  

UK regains top spot  
After six years in the wilderness, the UK has regained its position as Europe’s preferred investment destination, rising from 50% in 2023 to 84% in 2024. It is followed by Germany and France in second and third place, with 81% and 65%, respectively. Current market uncertainties and shift towards higher-risk strategies go hand in hand with a greater preference for scale and liquidity. 

After five consecutive quarters of negative capital growth, the UK All Property pricing correction since the end of Q2 2022 stands at -22.77%, in comparison to just -13.49% for Germany, and -14.19% for France. Investors are likely attracted to the substantial markdowns and opportunities for further discount in the UK.   

Residential takes first place and tailwind sectors capture interest   
The residential sector took the top spot as Europe’s preferred sector for the first time in the history of the survey, rising from 65% in 2023, to 90% in 2024. This was closely followed by industrial/logistics, which rose from 46% in 2023, to 87% in 2024.  

The results also reveal a substantial increase in investor preference towards student accommodation and healthcare in Europe, rising from 15% to 45%, and 19% to 35% between 2023 and 2024, respectively. Despite a relatively small market size, student accommodation and healthcare are closing the gap with the office sector, which fell into third place with 52%, down from 69% in 2023. 

On the other side of the spectrum, interest in retail plummeted to just 16% compared to the 2023 results (31%), leaving this sector as Europe's least favoured in 2024.  

Insatiable appetite for real estate debt
Real estate debt maintained its position as the preferred access route into European real estate for the third consecutive year, with an 81% net increase. Higher degree of capital protection relative to real estate equity and limited availability of debt from traditional lenders serve as major pull factors.  

Alongside debt, only two other access routes into European real estate are expected to see a net increase in allocations over the next two years. The joint ventures and club deals category is in favour, with a 47% net increase position, followed by separate accounts with a net positive position of 11%.  This highlights a desire to maintain greater control over their investments, gain access to specialism and share the risk.   

Stronger focus on diversity, equity, and inclusion programs 
Across all three regions, the two most important factors affecting 2024 investment decisions were interest rates and inflation. In Europe and North America, the third most common response was the denominator effect, indicating that real estate capital deployment over the next year may depend on what happens across more volatile equity and fixed income markets.  

Investors from all three regions reported a stronger focus on diversity, equity, and inclusion (DEI) programmes in 2024. At 73%, DEI saw a significant jump in importance for European investors, up from 57% in 2023.  

Interestingly, while 59% of investors globally have set a net zero target, almost 60% of these have identified a time horizon of post-2040 – a decade on from what many initially expected to be a goal of 2030. This is likely the result of current market conditions and the costs associated with meeting net zero targets.  

Iryna Pylypchuk, INREV’s Director of Research and Market Information said: ‘The 2024 Investment Intentions Survey has highlighted the difficulties investors are facing as they look for returns in a higher-interest, and high uncertainty market environment.  

‘However, it is at times of uncertainty that first mover advantage is rewarded, giving room to be optimistic for cash-rich investors. Despite many uncertainties prompting investors to adjust their allocations to real estate globally, as portfolios churn and investments mature, 85% of investors globally are expecting to deploy capital into real estate this year. We are entering a window of potential mispricing and repositioning opportunities be it through a bottom-up asset selection, by exploring market bifurcation or through private equity play as cash deprived players struggle to service their debt.”