Pivot to rate cuts to drive investment market recovery but not until late 2024

The expected pivot to interest rate cuts, coupled with further pricing adjustment to the sharp increase in interest rates to date, will help to fuel a recovery in capital market activity. We expect investment activity will gain momentum gradually in 2024, with ongoing subdued activity in the first half of the year, and the recovery gaining more traction later in the year and into 2025.

Real estate allocations to remain stable in 2024

According to the 2023 Institutional Real Estate Allocations Monitor , institutional investors expect to hold target allocations to real estate steady in 2024 at 10.8% globally. Asia Pacific-based investors, who have the lowest allocation to real estate among the major regions, expect to increase their target allocation by 50bps to 10.0% in 2024, while EMEA-based investors (who have the highest allocation) anticipate a 20-basis-point reduction to 11.3%.

Weighted average target allocation
By location of institution, per cent

Source: Savills Research using Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates 2023 Institutional Real Estate Allocations Monitor

Stable institutional investor allocations to real estate points to the confidence investors have in property despite the structural headwinds in some sectors such as office, while also highlighting the tailwinds in others such as industrial and logistics, build-to-rent, and student accommodation.

Investors beginning to see improving risk-return prospects    

While investor target allocations to property are expected to be stable in 2024, investor perceptions of real estate investment opportunities are improving. The “Conviction Index”, which measures institutions’ view of real estate as an investment opportunity from a risk-return perspective, increased from 6.0 to 6.4 (on a scale of 1 to 10), the second highest level since the index inception in 2013. Improving sentiment reflects increasing optimism that buying opportunities will emerge as valuations continue to adjust to higher interest rates.

Weighted average target allocation and Conviction Index
All institutions, per cent (LHS), index (RHS)

Source: Savills Research using Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates 2023 Institutional Real Estate Allocations Monitor

Limited fundraising but ample dry powder

Despite improving risk-return prospects, fundraising activity has fallen sharply this year and points to a gradual recovery in capital market activity in the near term. According to RealfinX, around US$120 billion of capital has been raised so far this year by closed-ended real estate funds, down nearly 50% on 2022 levels.

While fundraising has been weak, dry powder remains ample. According to RealfinX, around US$850 billion in unallocated capital is sitting in global closed-ended funds targeting real estate, highlighting the vast amount of capital ready to deploy. Most of this capital is sitting in value-add and opportunistic funds, ready to capitalise when the market moves. Major sources of capital include sovereign wealth funds and pension funds.

Asset recycling to add to capital market liquidity

Major property investors will continue to look for opportunities to dispose of lower quality assets in less desirable locations to redeploy capital to opportunities with stronger risk-return prospects. Some of the largest transactions in 2023 have involved large institutional investors selling out of relatively low-quality assets exposed to significant leasing risk to fund future development pipelines. Liquidity will be boosted by more motivated sellers, including open-ended funds under pressure from cash redemptions and capital recycling for redeployment opportunities. We expect this trend to gain further momentum in 2024 as investors look to rebalance their portfolios, adding to investment market liquidity.