A surge in asset pricing is prompting private equity real estate fund managers to reduce their targeted returns, according to a survey by Preqin.
Just over half - or 51% - of the 191 players polled said that planned to reduce their targted returns. Only 11% increased their performance goals. Asset valuations remain the chief concern for firms, with 49% seeing it as the biggest challenge over the next year.
'The private real estate market remains highly competitive, both in terms of obtaining investor capital and securing attractive assets,' noted Andrew Moylan, head of real estate products at Preqin. '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.'
Mid-market managers are seeing the greatest pressure on returns, with 67% of the firms with assets of $500-999 mln (€448-896 mln) reporting reduced targeted returns. Only 5% have raised their performance objectives.
Larger real estate fund managers (AUM of $1 bn or more) 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.
The bigger players are gaining ground
Competition for assets has increased compared to 12 months ago, according to the survey. The majority - or 58% - think that 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 over a third (35%) believe they have risen significantly.
The evolution of the industry is consistently moving in the favour of those firms with the resources and manpower to override market competition, Moylan added. 'Smaller and less experienced fund managers, however, face a trickier fundraising process while they also struggle to participate in such a costly marketplace, which has forced many mid- and small-market managers to downgrade their targeted returns.'
While 64% of fund managers have seen an increase in investor appetite for real estate, the experience varies for differing firm sizes. No less than 80% of managers larger than $5 bn 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, compared to the last 12 months. In contrast, just 5% of fund managers believe that there is now less competition when fundraising.
