Despite the uncertainty surrounding interest rates and inflation, global appetite for real assets remains strong.
Macroeconomic uncertainty and geopolitical tensions were among the key risks facing investors in 2023 and could continue to pose challenges for all asset classes.
Against this backdrop, institutional investors marginally reduced their overall real asset allocations, likely due to market falls and perceived risks in certain sectors. Real estate, for example, underwent a slow, and for some, painful repricing in the UK and Europe, two regions where transaction activity fell significantly.
However, appetite for future real asset investments is strong and continues to be driven by the search for diversification, inflation-linked and long-term income and positive environmental, social and governance (ESG) impacts.
Return expectations
Investors expect to see improving returns over longer periods across asset classes. For example, respondents expect real estate equity returns to be around 3.2 per cent over one year and reach 6.3 per cent over five years (these figures are based on weighted averages for expected returns, calculated using illustrative return bands). This expected rise in returns assumes markets will recover, particularly in real estate, which currently faces rising debt costs, and reduced demand in some sectors such as offices and retail.
Infrastructure equity and debt both see return expectations rise significantly too, which could reflect emerging markets' large infrastructure needs and global requirements to build the necessary infrastructure for climate change mitigation and adaptation.
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