Private Equity Investors Raised CRE Allocations in H1

Anyone who thought the giants of private equity – the pension funds, insurance companies, foundations and sovereign wealth funds – would be in a hurry to abandon the CRE markets amid the uncertainties in the real estate industry might be surprised by the results of PERE’s H1 2023 investor report.

Far from running away, the funds increased their allocations to real estate by an average of 76 basis points, according to the report, which focuses on private equity real estate investors. This was true even for sovereign wealth funds (SWFs), which had reduced their commitments from 2019 to 2022. For the first time in four years, SWF allocations rose to 7.92% in H1 2023, just short of 1% higher than in H1 2022. In all, 47% of SWFs raised their exposure to real estate in H1 2023.

Indeed, the top 15 commitments to real estate funds by private investment totaled $3.73 billion in this period.

“Having said that, this increased allocation across institution types was at least partly due to the denominator effect impacting most investors’ portfolios,” the report commented.

Once again, public pension funds had the highest average allocation to real estate, with an average of 10.6%, compared to 9.52% in H2 2022. “On the other hand, 22% of these funds lowered their allocations to real estate,” PERE noted.

The share of total investment devoted to CRE was 7.74% for private pension funds, 6.53% for insurance companies, and 5.41% for foundations/endowments.

“It is worth noting that the largest percentage of investors – 38% — were actually underallocated to real estate,” the report commented. “Meanwhile, 36% were overallocated while the remaining 26% were at target.” In particular, 67% of foundations and endowments were underallocated to this asset class.

According to the report, five of the 15 largest known commitments to private real estate closed-end funds in H1 2023 were made to funds focused on the multifamily or residential sectors. Six targeted diversified funds seeking opportunities in international markets. One aimed at industrial property in the Asia-Pacific region. The Dutch investor MN was the only European investor to make it into the top commitments league, with $437 million assigned to the Europe-focused M&G European Living Property Fund.

Indeed, over 53% of institutions tracked by PERE were based in North America – more than twice #2 Europe. Foundations and endowments represented 27.7% of all private investors, followed by public pension funds (20.8%), and private pension funds (11.9%).