Perspectives 2024: What investors think about private real estate

After a year like 2023, few would expect private real estate to have excelled on institutional investors’ scorecards. The year began with the continuation of a rapid series of interest rate hikes by most central banks, and ended with no cuts in sight – albeit a modicum of stability. In between, property values tumbled in most markets globally, the collapse of multiple US regional banks caused lenders to retrench, and transaction volumes plummeted as buyers and sellers fled to the sidelines for safety.

Against this backdrop, institutional confidence in private real estate was brought into the spotlight. Open-ended vehicles were gated following a surge of investor redemption requests, fresh commitments all but dried up as the denominator effect unbalanced institutional portfolios, and refinancing concerns rose to the forefront.

Early in 2024, the heightened uncertainty in the macroeconomic landscape prevails – as do questions about real estate’s worth in an institutional portfolio. However, PERE’s Investor Perspectives 2024 Study shows that most investors retain appetite for real estate, even if sector and strategy preferences continue to shift. In fact, a substantial proportion are hungry for even more.

PERE’s study provides a granular view of the market, both current and future, by gathering insight on investors’ asset allocations, propensity to invest and performance predictions. It is a global study, reflected in the question set and the respondents, which allows for cross-regional comparisons across asset classes.

The question set is reviewed annually in order to reflect market developments and shifts in sentiment. For this 2024 study, PERE’s Research & Analytics team surveyed 117 institutional investors in private markets, of which 44 allocate to private real estate. Fieldwork was carried out from September to October 2023, and participation in the study is always anonymous.

Decline and fall

The price correction of the past 12 months has dealt a blow to future performance expectations, yet investors are keen to ride out the storm

One year ago, 31 percent of respondents to PERE’s 2023 investor survey expected returns from their real estate investments to fall short of the benchmark in the coming 12 months. A year later and returns have proven worse than investors anticipated. Almost half, 48 percent, of investors in this year’s study say real estate has underperformed over the past 12 months. This marks an increase from only 14 percent one year prior, and represents the largest proportion in recent years to report dissatisfaction with returns.

Such findings illustrate the extent to which steep interest rate rises depleted capital values over 2023. However, while the proportion of investors expecting real estate to continue underperforming in the next 12 months has ticked up from last year, the market correction has not dented appetite for the asset class. On the contrary, 39 percent of investors intend to invest more capital in real estate over the coming year, compared with 35 percent looking to maintain the same amount and 27 percent planning to invest less. Moreover, these figures represent a reversal in sentiment from a year ago, when 27 percent looked to invest more in the asset class and 35 percent expected to invest less.

Despite this projection of net capital inflows to managers, the majority of investors are at their target allocation to real estate. The level of reported overallocation remains consistent with last year’s survey at 21 percent, with one-quarter of investors under-allocated to real estate – the lowest figure in recent years by a significant margin.

Strategy shuffle

Value-add and residential have risen to the top of the list for fresh capital injections

Real estate opportunities higher up the risk/return spectrum remain in favor among investors. But where 21 percent of respondents to last year’s investor study were looking to invest more capital in value-add strategies over the coming year, this has increased to 27 percent in PERE’s 2024 survey, the most of any strategy. That said, value-add also scored the largest proportion of investors looking to invest less capital in any one strategy, at 19 percent. 

Appetite for real estate debt has cooled slightly compared with last year, but it remains one of the most favored strategies, with 23 percent of investors looking to inject fresh capital into debt in the next 12 months and only 6 percent planning to reduce investment levels.

Compounded by capital value declines and rising vacancy rates in many jurisdictions, the office sector has continued its fall from grace among investors. A substantial 41 percent of respondents intend to invest less capital in office over the next year, with only 2 percent looking to invest more. These compare with 50 percent and 7 percent in last year’s study, respectively.

Conversely, residential is investors’ top choice of sector, with a third of respondents planning fresh capital injections into the asset class. Within this, multifamily remains the preferred subsector as cited by 65 percent of respondents, but build-to-sell developments have notably seen a 9 percentage-point uptick in appetite versus one year prior.

In the alternatives space, the proportion of investors citing student accommodation as their favored sector has doubled since last year from 10 to 20 percent. Appetite for hotels also more than doubled from 5 to 12 percent. Data centers and healthcare property have consequently seen proportional declines in appetite at their expense.