Wed, 07/03/2018 - 09:19
The private equity real estate market has seen several years of strong performance, and funds of the most recent vintages have outperformed all other private capital asset classes, according to new figures released by Preqin.
For vintage years 2013 and 2014, real estate funds have posted higher median net IRRs than all other private capital asset classes, returning 14.3 per cent and 12.2 per cent respectively. This strong performance may in part explain why a significant majority (88 per cent) of investors felt their real estate investments met or exceeded their expectations in 2017, while 91 per cent felt the same about their portfolios over the past three years.
However, there are concerns that the industry will not be able to sustain this level of performance, given that half of investors and more than half of fund managers believe that the market has reached its peak. Crucially, 61 per cent of fund managers that are bringing a fund to market have said they are reducing their targeted returns, and a quarter of investors expect performance in 2018 to be worse than in 2017.
As a result of recent strong performance, 88 per cent of investors felt their real estate investments had met or exceeded their expectations in 2017, and 91 per cent felt the same about their portfolios over the past three years. However, 48 per cent of fund managers and 50 per cent of investors now believe the real estate market is at a peak going into 2018.
Some 61 per cent of fund managers are reducing the targeted returns of funds they are bringing to market as they lower their performance expectations. At the same time, 24 per cent of investors expect real estate performance to be worse in 2018 than in 2017, while 14 per cent expect it to improve.
However, 56 per cent of fund managers report that investor appetite has increased over 2017, despite concerns over asset pricing and performance.
Investors are still set to commit significant capital to real estate in the year ahead. Twenty-six per cent intend to invest more in 2018 than in 2017, while the proportion that will reduce their exposure has fallen to 16 per cent in December 2017, down from 24 per cent 12 months prior.
As a result, 69 per cent of fund managers believe that the size of the real estate industry will continue to grow over the year ahead.
“The private real estate industry has proved valuable to investors: performance has been strong in recent years, and among the most recent vintages real estate has the highest average return of any private capital asset class. Given that, it is no surprise that the vast majority of investors have pronounced themselves satisfied with the performance of the asset class in recent years,” says Oliver Senchal, Head of Real Estate Products at Preqin. “However, pricing concerns are at an all-time high, and significant proportions of both investors and fund managers feel that the market is currently at a peak. That managers are lowering their targeted returns is a sign that they do not know that the current level of performance is sustainable.
“This does not mean the real estate industry is set to lose its lustre for investors. The majority still intend to commit at least as much capital to the asset class as they do currently, both in 2018 and over the longer term. It is also worth noting that performance relative to expectations may remain on course: investors value factors beyond headline figures, such as diversification, inflation protection, low correlation and risk adjustment. The high-point in the market may mean that top-level returns in the years to come may not match current levels, but real estate is likely to play an important role in investors’ portfolios nonetheless.”
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