INREV: Non-listed funds to draw more capital than overall sector

Future capital allocations to non-listed real estate will grow at a faster rate than the general real estate sector, according to a new Capital Sources Survey published by INREV.

'Dry powder', allocated but unplaced institutional capital; and changes in investor behaviour are, in part, driving this trend. The research estimates at least EUR 65 bn of available equity (unleveraged) annually until the end of 2014.

Much of this capital is coming from Europe and is dominated by UK, German, Dutch and French investors with a focus on domestic investments, or investments in the large, core real estate markets around Europe. This reflects the growth in the number of smaller and medium sized pension funds entering the sector for which non-listed real estate is a preferred mode of investment given their scale and resources.

'This survey reveals a complex picture of changing capital sources. It reinforces trends we have seen elsewhere in earlier INREV studies. Debt remains constrained and expensive but equity is playing to the advantage of non-listed relative to real estate as a whole. And even if fund-raising remains competitive, new capital is coming into the sector. That in itself should be seen as a positive,' concluded Lonneke Löwik, INREV's director of Research and Market Information.

Over 75% of fund managers expect commitments to non-listed real estate funds to increase and some of Europe's main institutional investor markets also expect to see increases in real estate allocations. Many lending institutions have, however, sought to reduce their exposure to the sector and even going as far as withdrawing from real estate lending altogether especially in the UK. This trend looks set to continue.

INREV's survey also reveals that 10% of fund managers have failed to secure refinancing on at least one asset due to the withdrawal of bank lenders from the market.

'Like investors, lenders have lost their appetite for risk. In rationalising their loan books they are focusing not merely on reducing the size of their real estate exposure, but on increasing the quality of it by focusing on high quality underlying assets, in prime capital cities and core markets. We’re seeing an understandable flight to quality and safety. This is challenging the non-listed real estate sector, but it also presents opportunities,' said Brenna O’Roarty, owner of RHL Strategic Solutions, who carried out the research on behalf of INREV.