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Around 41% of the investors surveyed expect to increase their asset allocation to real estate, making it the alternative asset class in which investors are most likely to ramp up exposure, the survey by PricewaterhouseCoopers found.
 
John Forbes, U.K. real estate leader at the audit and advisory firm, said longer-term investors are looking to invest in emerging markets, and particularly China, where they believe changing demographics could drive up the market. The population isn't going to grow significantly in China, but as people get richer there will be an increasing demand for better housing and new retail and office space, he said.

"The rise of the middle class is going to be a phenomenon over the next 20 years," Forbes said.

Other investors still see opportunities in the U.K. and other markets where valuations have dropped back sharply.
U.K. commercial real estate values are down as much as 20% to 25% from their level in the summer, Forbes said.

Investors that got out of the market two or three years ago because they thought valuations were too high are therefore starting to see opportunities to reinvest, he added.

There are also, however, a significant number of investors that have been discouraged by the recent real estate downturn, with 21% of the respondents saying they expect to reduce their allocations to the sector.

Among other asset classes, 40% of institutional investors are likely to pump more money into private equity and 33% planning to increase their exposure to hedge funds, the survey found.

The mega-private equity deals of 2006 and 2007 are likely to be a thing of the past as buyout firms can simply no longer obtain the degree of leverage they could before the credit crunch, said Rob Mellor, U.K. financial services tax leader at PwC.

But there's still plenty of institutional money from state pension funds and oil-rich countries looking for investment opportunities.

In terms of private equity, the deals that are likely to continue are those "that don't just rely on financial engineering," but actually add some value, such as by bringing in a new management team, Mellor said.