Private equity real estate managers are reducing their targeted returns due to asset valuations, according to Preqin.

Its survey of 191 private equity real estate fund managers found that asset valuations were their chief concern.

Around 49% saw valuations as the biggest challenge over the next year, Preqin said.

An equal proportion noted an increase in competition for assets compared with 12 months ago, while the majority of respondents (58%) think it has become harder to find attractive real estate assets over the past year.

As demand increasingly outstrips supply for attractive investment opportunities, 63% of real estate managers have seen an increase in asset pricing, and more than one-third (35%) believe they have risen significantly.

Andrew Moylan, head of real estate products at Preqin, said the private real estate market remained “highly competitive, both in terms of obtaining investor capital and securing attractive assets”.

“Record levels of dry powder and institutional investors increasingly looking to use their sophistication to invest directly within the asset class, rather than through fund managers, have seen nearly half of all surveyed real estate firms state that there is more competition in the market for deals than last year,” he said. 

“Smaller and less experienced fund managers, however, face a trickier fundraising process while they also struggle to participate in such a costly market, which has forced many mid- and small-market managers to downgrade their targeted returns.” 

Due to these challenging buy-side conditions, the majority of private equity real estate fund managers surveyed (51%) have reduced the targeted returns of their funds in market, with just 11% increasing their performance objectives.

Mid-market managers are seeing the greatest pressure on returns; 67% of firms with assets of $500m (€451m) to $999m have reduced their targeted returns, while just 5% have raised their performance objectives.

Larger real estate fund managers with more than $1bn in assets under management are the most likely of any size group to maintain their targeted returns, with 53% either maintaining or increasing their performance goals regardless of asset valuations or competition.

Preqin said nearly two-thirds (63%) of private equity real estate fund managers planned to deploy more capital in the coming 12 months, compared with last year. 

It also found that 35% of firms would look to deploy significantly more, while just 12% expected to reduce their level of investment.

While 64% of fund managers have seen an increase in investor appetite for real estate, the experience varies for differing firm sizes.

Preqin found 85% of managers larger than $5bn stated investor appetite had increased, following the trend of the largest firms securing a growing proportion of investor capital.

With a record number of funds being marketed, nearly three-quarters (73%) of real estate firms have seen an increase in competition for investor capital.