By Rich Hill, head of real estate strategy and research at Cohen & Steers
More investors are allocating to REITs, as listed and private real estate repriced, and more investors seek liquidity.
Key takeaways
- The 2024 Institutional Real Estate Allocations Monitor has just been released, and it shows that institutional investors’ target allocations to real estate are up nearly 200 bps points since 2013.
- Investors shifted from over-allocated to under allocated to real estate over the past 12-months, due to allocation shifts when public valuations rose while private CRE valuations declined.
- More institutional investors are allocating to listed REITs, with the need for liquidity cited as the biggest driver of listed allocations.
1. Increased target allocations to real estate
Target allocations to real estate are up nearly 200 bps since 2013, representing an increase of over 20%.
EXHIBIT 1
Institutions have increased real estate target allocations by 20%
Weighted average target allocation
At October 31, 2024. Source: 2024 Real Estate Allocations Monitor
Target allocations remained at 10.8% in 2024, but they are expected to decline by 10 bps to 10.75% in 2025. Given the headwinds facing the sector in recent years, investors have largely remained on the sidelines. However, real estate remains an important allocation in institutional portfolios, and investors generally believe that real estate is likely to deliver strong performance over the next cycle.
2. The denominator effect
Investors shifted from over-allocated to under allocated to real estate over the past 12-months due to what is called the denominator effect. The “denominator effect” refers to a situation where an investor’s allocation – to private real estate, for instance – appears to have increased as a percentage of their overall portfolio because other asset classes within their portfolio, like public equities and bonds, have significantly decreased in value. This causes the private real estate portion to represent a larger relative share of the investor’s allocation even if the absolute value has not changed materially. This is what occurred in 2022 as private real estate valuations rose while public valuations, including both equities and bonds, declined. This pushed actual average allocations to real estate to their target allocations, but almost forty percent of institutions reported that they were over allocated.
EXHIBIT 2
Real estate allocations have moved below target
At October 31, 2024. Source: 2024 Real Estate Allocations Monitor
This followed an eight-year period when they were under-allocated to real estate by an average of 100 bps. Fortunes reversed in 2023 and continued in 2024 with public valuations rising while private CRE valuations declined. Net-net, we believe unlevered private real estate valuations are down 20-25% since mid-2022. As a result, while target allocations remained flat in 2024, actual allocations to real estate decreased 60 bps to 10.2%.
Nearly 50% of institutions now report they are under allocated to real estate in 2024 vs. less than 30% that say they are over allocated.
3. Outlook for 2025
Finally, we have recently explored the benefits of adding listed REITs to a private portfolio of real estate. It appears that more institutional investors are seeing that benefit too. The 2024 Institutional Real Estate Allocations Monitor notes that 39% of institutions invest in REITs, up three percentage points from the year prior. This ranges from 10% of private pensions to 71% of sovereign wealth funds and government- owned entities. The average exposure to listed REITs within a portfolio of real state is 11% with insurance companies having the greatest exposure at 14%. Liquidity is the primary reason for investing in REITs, cited by 67% of investors in the survey, up from 46% the year prior. We think this increased focus on liquidity is likely indicative of gating that has occurred in many private real estate funds whereby investors have not been able to withdraw their money this year.
EXHIBIT 3
More institutions cite liquidity for investing in REITs
Reasons for investing in REITs
At October 31, 2024. Source: 2024 Real Estate Allocations Monitor
REITS as part of the core real estate strategy is the next highest reason for investing in listed real estate at 47%. At certain allocations, listed real estate can help reduce volatility, increase returns, and mitigate drawdown risk of an overall portfolio. Accessing other niche strategies is the third reason to invest at 28% This is likely underappreciated given approximately 60% of listed REIT market cap is in next generation strategies like data centres, cell towers, and single-family rentals.
