In its latest “Real Estate Spotlight,” Preqin says that the institutional investor appetite for real estate is expanding after a severe and years-long contraction globally.
The study, which is also available in full, breaks down responses by geographical category: North America, Europe, and the Rest of the World. The RotW is much more intent upon real estate investments over the next 12 months than are investors in the other two locales. Seventy-two percent of RotW investors answered “likely to commit,” in contrast to 47 percent in North America and just 32 percent in Europe.
“A number of factors may be affecting European investor appetite,” Carla Henry and Farhaz Miah, the authors of the piece that appeared in the Spotlight, “including the European sovereign debt crisis and increased regulation.”
Preqin interviewed more than 100 institutional investors during June and July of 2012. The interviews were in some depth, including discussion of investors’ plans for the next 12 months, key issues of strategy, and what fund managers can do to stand out in their eyes. As the pie-chart below indicates, the good news is that 37 percent of the interviewees said they expect to deploy more capital to real estate over the next 12 months than they did over the last 12 months. The better news is that in a January 2012 survey only 26 percent had said that.
On the negative side, 32 percent of investors in the latest study said that they didn’t commit any funds in the last twelve months and that they don’t expect to commit any in the coming 12 months either. That is a sizeable vote for continued gloom.
Private real estate funds pursue any of several strategies. These are: core, opportunistic, value added, debt, core-plus, distressed, and fund of funds. The “core” strategy (at the low-risk and low-return end, also not highly leveraged) draws easily the most interest from the surveyed investors. What some may see as odd is that the opposite approach, the high-risk, high-return, “opportunistic” strategy, comes in second, with the others, occupants generally of the middle of that spectrum, are far behind both.
The Big Picture
It is unsurprising that fundraising for private real estate funds slowed down during and has remained slow since the economic crisis of 2008. More than $130 billion had been raised for such funds in 2007, and again in 2008. But the number for 2009 was just over $50 billion, and for 2010 was even less, $45.8 billion.
The year 2011 was a little better than the two previous, but fundraising for the year 2012 to date is again quite slow.
The difficult fundraising environment is of course why it is important news that there is a shift of attitude under way.
How might fund managers stand out in the eyes of potential investors? Some investors want you to have skin in the game. A South Korean banker said, “Fund managers should commit a minimum of 5 percent of the bank’s capital.” Other respondents stressed an RE manager’s groundedness, (pun intended), his local knowledge, hands-on experience, and so forth. A U.S. pension fund said that it demands of would-be recipients of its funds “a high standard of fiduciary duty [and] a strong performance track record.”