For the first time on record, the world's largest institutional investors have collectively reduced their allocations to private real estate. A new report reveals a 3.6% decline in aggregate holdings, signaling a significant shift in investment strategy driven by economic pressures and market uncertainty.
This downturn follows a period of minimal growth, with allocations increasing by only 2.8% in the previous year. The change reflects widespread negative sentiment among investors as they navigate rising interest rates, prolonged property value adjustments, and better returns in other asset classes.
Key Takeaways
- The top 100 global investors' aggregate real estate allocation fell by 3.6%, the first decrease ever recorded.
- The average allocation to real estate within portfolios dropped from 10.9% to 9.6%.
- Economic factors, including interest rates and a strong U.S. dollar, contributed to the decline.
- Many investors are pausing new commitments, while others are actively selling properties to rebalance their portfolios.
- Despite the downturn, some experts anticipate a rebound in allocations as market conditions stabilize.
A Market in Transition
The primary driver behind this historic shift is the ongoing repricing of the real estate market. Persistent macroeconomic headwinds, including elevated interest rates, have suppressed property values and discouraged new investments. Elizabeth Bell, co-head of real estate at adviser Hamilton Lane, noted that investor boards were hesitant to commit capital during 2022 and 2023.
"Boards weren’t excited to deploy in real estate during an environment of a falling knife," Bell explained, referring to the rapid decline in property values. This caution was compounded by the denominator effect, where falling public market values artificially inflate the percentage of private assets like real estate in a portfolio, often forcing a pullback to maintain target allocations.
While the market began to show signs of price stabilization around mid-2024, it was not enough to immediately restore confidence. During this period, other alternative assets such as private equity and private credit demonstrated stronger performance, attracting capital that might have otherwise gone to real estate.
Investor Caution and Shifting Strategies
The data reveals a clear trend of caution among the top investors. Out of the 100 institutions ranked, 59 decreased their real estate allocation year-over-year, while only 36 increased their holdings. This hesitation has pushed the average real estate allocation down to 9.6% of total investments, the first time it has fallen below 10% since 2021.
Prashant Tewari, a senior managing director at advisory firm Townsend Group, described the situation as an allocation "freeze" rather than a strategic withdrawal. He observed that investors are not necessarily reducing their long-term targets for real estate but are holding back on new commitments.
"It is not that investors are pulling out of investments, but they are just cautious and so they are not putting as much capital out," Tewari stated.
This cautious approach is evident in the actions of major pension funds. The California State Teachers’ Retirement System (CalSTRS), for example, saw its real estate allocation fall from 15% to 13% of its portfolio. Julie Donegan, CalSTRS's director of real estate, confirmed the pension has been "very diligent about slowing down our pacing" on new investments.
Slow Capital Recycling
A major factor limiting new investment is the slow return of capital from existing funds. According to PERE data, 37% of value-add and opportunistic funds from the 2020 vintage had returned 10% or less of their capital by the end of 2024. This liquidity crunch restricts investors' ability to reinvest in new opportunities.
Active Selling and Strategic Pivots
While some investors are pausing, others are actively selling assets. Zurich Insurance Group has been implementing a strategic sales program to reduce its real estate exposure. The insurer's property portfolio declined from $15.4 billion to $13 billion, causing it to drop four places in the ranking to 40th.
Andrew Angeli, global head of real estate research and strategy at Zurich, acknowledged the shift. "Between 2014 and 2022 real estate took allocation from other asset classes, and now we’re giving some of it back," he said, noting that other assets now offer compelling risk-adjusted returns.
On the other side, some institutions took advantage of the market dislocation. Norges Bank Investment Management (NBIM), which manages Norway’s sovereign wealth fund, climbed seven places to 13th. In its annual report, NBIM stated, “We capitalised on the uncertainty and lack of liquidity in the market to make a number of purchases.”
Similarly, CPP Investments increased its real estate allocation by 8%, moving up five spots to 11th. Sophie van Oosterom, head of real estate at CPP, said the portfolio grew through "disciplined deployment into strategies aligned with long-term structural themes."
Global Headwinds and Currency Impacts
The strengthening of the U.S. dollar significantly affected the rankings of non-US investors. In 2024, the U.S. Dollar Index rose by 7.1%, causing the value of portfolios held in other currencies to appear smaller when converted to dollars.
The Currency Effect
The impact of currency fluctuations was substantial. Among the 67 non-US investors in the ranking, only 18 saw their portfolio value decline in their local currency. However, when converted to U.S. dollars, that number jumped to 43. European institutions were hit particularly hard, with their aggregate allocation falling by 7.9%.
Canadian investors also faced challenges, with the Canadian dollar falling 7.9% against its U.S. counterpart. This contributed to allocation declines for 11 of the 12 Canadian institutions in the ranking.
The Office Sector's Lingering Influence
The ongoing struggles in the global office market have also played a significant role. Value declines in office properties have impacted investors with heavy exposure to the sector, particularly in the United States.
Public Sector Pension Investment Board (PSP Investments) of Canada noted in its annual report that its real estate portfolio was "hit particularly hard by the structural changes in the office sector." The pension fund saw the sharpest allocation decline among its Canadian peers.
Despite the widespread challenges, some see a turning point ahead. Experts suggest that as interest rates stabilize and the gap between buyer and seller expectations narrows, transaction activity and new allocations will begin to recover. Tewari believes the groundwork for a rebound is already being laid. "In the coming quarters, you’re going to see an uptick in capital being allocated to the sector," he predicted.
