Investors on both sides of the Atlantic have begun to allocate new equity to real estate. But will capital flows over the next 12 months continue to be a trickle, or will investors finally open the floodgates? Richard Lowe investigates

There are a few signs that capital-raising wheels are beginning to turn in the global real estate markets. There have been some notable successes in first half of 2010, such as Partners Group's global mandate with the Korea Investment Corporation, and Pramerica's European debt strategy, which attracted a commitment from APG Asset Management. But while fundraising levels might be healthier than they were in 2009 or 2008, they are still low.

Henderson Global Investors has raised £100m (€121m) in new capital for its central London office fund and is hoping to attract a further £150m, but Mike Sales, head of global property investments, admits that it has been hard going. "Everyone talks up capital raising and there are headlines in the press quoting large numbers," he says. "But the reality is that it is harder to raise capital, even when markets have fallen
and are recovering, than perhaps it has been for a long time."

Mark Chamieh, head of marketing for Europe at Pramerica, says one of the impediments to new capital-raising is the significant volume of existing commitments that investors have with fund managers.

"The last few years were particularly risk averse," he says "They were dealing with a lot of issues with their existing commitments. They had manager issues, general partner issues to deal with; they had other limited partners who were failing to fund their commitments. Even towards the latter part of last year and the beginning of this year, even though their views of the market had improved they had made commitments to a number of funds that had not been drawn down."

The result has been not much new capital moving around. But Chamieh believes that this year he has seen a change in sentiment, and investors are starting to become more active, "putting their heads over the parapet, and looking at opportunities and looking to deploy capital".

However, all might not be all plain sailing. Renewed fears of a double-dip recession in Europe could well prolong the current period of cautiousness in the international investor community.

Kiran Patel, global head of business development, distribution, research and strategy at AXA Real Estate, does not expect to see a double-dip recession, but he admits that if there is one, investors will continue to hold back and delay decisions to allocate capital. There is, therefore, a degree of uncertainty hanging over the capital raising markets in the near future.

Patel says that if you combine this uncertainty with growing regulatory pressures in the shape of Basel III and Solvency II (the latter will affect insurance companies directly and could influence pension funds indirectly), fund raisers are faced with a natural cautiousness.

"How it will evolve, I think, depends on how investors perceive their allocations," he says. "I hope the majority are medium-to-long-term decision makers, so some may be starting to say, let's look to the next cycle, we need to get capital invested."

If and when capital does start moving significantly again, the question is: where will it end up? In the short term the indications are the US.

Chamieh says there is a lot of capital heading from Europe to the US. "The perception is that there is value in the large, core open-ended funds in the US," he says. "You have had significant peak-to-trough declines in those funds and they are pretty much at their bottom. Some of them are over-levered and therefore investors will benefit from getting into those funds now and riding the markets back up."

Simon Redman, head of business development at Invesco Real Estate, says he has noticed a great deal of interest in the US from European investors. At the beginning of the year, the firm raised money from a number of German investors to invest in core US real estate.

But capital is not flowing so well in the opposite direction. Redman says US investors are focusing on their domestic core market rather than looking to cross the Atlantic, partly because of the attractiveness of their home market but also because they are further behind their European counterparts in moving from legacy issues and existing commitments to making new investments. "European investors started coming back into the market ahead of the US. US investors only really started at the beginning of this year," he says.

It will be interesting to see the effect of a build-up of international and domestic capital in the US market where, so far, there has been limited transactional activity. Redman wonders if the US market will over the next few months begin to resemble the recent experience in the UK market.

"While there is quite a lot of money piling up in the US to invest in the market, there are still few transactions, and that will probably lead to a similar situation to that in the UK," he says. "It will be interesting to see is how quickly values rise and whether it becomes overheated as it did in the UK. I think we will see a steep recovery rather than a slow recovery, due to the weight of capital."

The space to watch is that of the US-based investor community, which represents a large proportion of the capital base of global real estate, according to Patel. "The US investors are more prolific in their approach," he says. "They are the guys to keep an eye on. They will come across the water to parts of Asia and Europe. They will get the machine working again, there is no doubt about that."

Patel also believes that when US capital is fully mobilised again it will drive higher-returning strategies in the market, as is their tradition when investing globally. He believes the value-add space will come back generally as the - almost exclusive - focus on core begins to widen.

Chamieh agrees: "Now some of the investors are saying core is looking a little bit expensive with all the capital that has chased it. They are looking to take more risk into the value-added space."

However, Sales believes the transition from core to value-add will take longer than perhaps some are expecting. He says it will happen as part of the standard cycle, but with the present economic outlook value-add is unlikely to come back in vogue in less than two years.