Global Investors Reduce Real Estate Holdings for First Time

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.

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.

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.

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.