GLOBAL - Excess capital accumulated by US real estate private equity funds in the first half of 2007 will help them mop up in a downward-valued market, according to an Ernst & Young report on real estate private equity funds.

Although the recent market correction could delay planned fundraising for new funds, it has increased the value of "sizeable war chests" in a market characterised by diminishing liquidity. As a result, funds' existing capital will allow them to exploit pricing opportunities.

However, the report also found many funds were selling assets before schedule because "the opportunity to lock in returns and take the market risk off the table was too attractive to pass up".

The report, which polled 285 funds that raised US$23.5bn in H1 2007, found emerging asset classes such as hospitality and infrastructure have gained traction against office, retail, multifamily and industrial. In particular, 75% of the funds polled said the current market created greater potential for infrastructure returns.

"Although private capital currently flowing into infrastructure is substantial, anecdotal evidence suggests it is dwarfed by the potential size of this market," said the report. 

In global terms, fund sponsors cited India and China as the greatest potential for risk-adjusted returns.

Meanwhile, the study revealed considerable optimism for domestic real estate fundamentals, which it said had in recent years "been somewhat of a secondary consideration" to activity in capital markets. Of those polled, 90% said improving real estate fundamentals would boost operating income above inflation.