World In search of higher risk

The slight overallocation is largely due to European investors who have an average allocation of 10.5 pct, which is 67 basis points above the average target. 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. European investors are the most bearish on expected allocations, with a substantial 43 pct expecting a decrease in allocations and only 16 pct expecting an increase.

The shift towards core strategies reported last year has seen a sudden reversal. In fact, over three quarters (78 pct) of investors looking to deploy capital in Europe in 2024 are seeking higher-risk strategies, with the majority (55 pct) preferring value added strategies. In contrast, only 21 pct 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 pct in 2023 to 64 pct this year – European investors remain the most risk-averse. After six years in the wilderness, the UK has regained its position as Europe’s preferred investment destination, followed by Germany and France. Current market uncertainties and shift towards higher-risk strategies go hand in hand with greater preference for scale and liquidity.

The results also reveal a substantial increase in investor preference towards student accommodation and healthcare in Europe, rising from 15 pct to 45 pct, and 19 pct to 35 pct 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 pct, down from 69 pct in 2023.
On the other side of the spectrum, interest in retail plummeted to just 16 pct compared to the 2023 results (31 pct), leaving this sector as Europe's least favoured in 2024.

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 pct 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.
Iryna Pylypchuk, Inrev's director of research and market information

Real estate debt maintained its position as the preferred access route into European real estate for the third consecutive year, with an 81 pct net increase. 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 programmes in 2024. At 73 pct, DEI saw a significant jump in importance for European investors, up from 57 pct in 2023.

While 59 pct of investors globally have set a net zero target, almost 60 pct 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.