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Attracting Institutional Capital: Changing Investor Appetite for Private Real Estate

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With increasing investor appetite for private real estate resulting in improved fundraising, Preqin compares fund managers’ and investors’ views on current market conditions.

Investor Appetite

Recent years have seen institutional investor appetite for private real estate investment fluctuate, with many remaining cautious of placing new capital in the asset class due to an uncertain market. However, the last 12 months have seen considerable improvements in private real estate fundraising, with a total of $43bn raised from funds reaching a final close in H1 2014, a 30% increase from the $33bn raised by funds closed in H1 2013. This improvement has been driven by an increase in investor appetite for real estate investment, with the vast majority (82%) of fund managers surveyed by Preqin in June 2014 stating that they have seen a significant or slight increase in investor appetite in the last 12 months, with just 4% seeing a decrease in institutional appetite.
Correspondingly, when investors were asked in July 2014 whether they had made commitments to private real estate funds in the previous 12 months, 52% stated that they had, increasing from the 41% of respondents that stated so in December 2013. This reveals that the increase in investor appetite seen by managers in the last year was realized through a greater number of investors making private real estate commitments. However, many investors remain wary of investing in the asset class, with just 34% of investors planning to make new commitments in the next 12 months, similar to the 35% which stated so in December 2013. However, many of those active investors intend to commit large amounts of capital to real estate in the next year, with 55% of investors planning to commit $100mn or more, compared with 40% which stated so in August 2013, indicating that significant amounts of capital are likely to flow into the asset class, further bolstering fundraising figures.

Competition for Capital

Despite signs of investor appetite for the asset class improving over the last 12 months, fundraising is still a challenging prospect for many managers; 68% of fund managers stated that there has been a significant or slight increase in competition for investor capital compared to 12 months ago. As of July 2014, there are 455 private real estate funds in market, targeting an aggregate $163bn in capital commitments. As a consequence, despite many investors putting more capital into private real estate funds, competition among managers for institutional capital remains high. One of the key causes of this is that investors are increasingly looking at experienced managers with a proven track record, meaning that fundraising for first-time or less experienced managers remains challenging. This can be seen in recent fundraising data; although the amount of capital raised in H1 2014 surpasses that of H1 2013, the number of funds reaching a final close declined from 112 to 80 over this time period, demonstrating that capital is increasingly concentrated among fewer managers.

Investor Proactivity

Many investors are becoming more proactive regarding their real estate portfolios, often demanding more information from fund managers as to where their capital is being placed. The majority of fund managers have experienced investors requesting both more frequent and more detailed reports on fund performance and investment holdings, as well as investors making more one-off requests for information. Fifty-six percent of fund managers agree that investors are requesting more frequent reports, 67% agree that they are requesting more detailed reports and 59% agree that investors are making more one off-requests for reports specifically on performance and investment holdings.

Investor proactivity is further demonstrated by the fact that a quarter of investors source their fund opportunities through an internal investment team, with an additional 28% of institutions finding relevant opportunities via networking and peer recommendations. With investors making more requests regarding fund investments and taking a more proactive role in examining where their capital is being placed, many fund managers are consequently increasing the size of their investor relations teams in order to keep their investors well informed. Thirty-eight percent of fund managers stated that they will be increasing the size of their investor relations team in the next 12 months, with no managers planning to decrease the size of their team.

Outlook

Improving market conditions and increasing investor appetite for real estate investment has contributed to a strong first half of 2014, with fundraising showing considerable signs of growth and increasing proportions of investors making commitments to private real estate funds. Going forward, this looks to continue, with many investors planning to make new commitments in the next 12 months.

However, fundraising is still a challenging prospect for fund managers, with a large number of funds in market competing for capital and investors increasingly seeking managers with proven expertise. As investors become more proactive, they are requesting more detailed and more frequent reports on fund performance and investment holdings, meaning managers are often required to increase internal costs through growing their investor relations team. As such, despite investor appetite showing signs of improvement, managers will continue to have to work hard to attract interest. Those managers that can effectively listen to investors’ concerns and work to improve the flow of communication can help to ensure they will continue to be backed by their existing investors when they next come to market with a new fund. Investors that are prepared to re-up with existing managers send a very positive message to other potential investors, further increasing a manager’s chance of future fundraising success.

This is an excerpt from Real Estate Spotlight – August 2014. To download the full report, click here.

 

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