After several years of strong performance from the private equity real estate market, funds of the most recent vintages have outperformed all other private capital asset classes globally, according to new research from Preqin, the alternative assets information specialist.
'The private real estate industry has proved valuable to investors: performance has been strong in recent years, and among the most recent vintages real estate has the highest average return of any private capital asset class,' said Oliver Senchal, Preqin's head of real estate products.
'Given that, it is no surprise that the vast majority of investors have pronounced themselves satisfied with the performance of the asset class in recent years. However, pricing concerns are at an all-time high, and significant proportions of both investors and fund managers feel that the market is currently at a peak. That managers are lowering their targeted returns is a sign that they do not know whether the current level of performance is sustainable.'
Heat rising in Spain
The Preqin research turns the spotlight on Spain, where 77 transactions were completed in 2017, worth an aggregate €3.3 bn in value - €0.3 bn higher than the previous year, when 63 deals were signed.
Preqin notes that the largest deal of the year involved TH Real Estate’s acquisition of a 50% stake in Madrid Xanadú shopping centre from Intu Properties for €264.4 mln.
Meanwhile, the largest portfolio deal in Spain in 2017 involved PointPark Properties’ acquisition of 11 logistics assets from Gore Spain Holdings, an asset manager wholly owned by GreenOak Real Estate. The portfolio comprises assets in strategic logistics locations across Spain, including Madrid, Zaragoza, Toledo and Guadalajara, as well as coastal cities such as Valencia and Biscay.
Outside of Madrid, Nueva Condomina – a 1,200,000 ft2 (111,500 m2) shopping centre in Murcia – was acquired by Paris-based Klépierre for €233 mln from BNP Paribas REIM Germany, making it the third largest transaction of 2017 in Spain.
The other two key deals were the acquisition by Hines and Universal Investment of the Baraka Group's retail portfolio in Madrid, worth €190 mln, as well as Blackstone's purchase of project Buffalo from BBVA for €170 mln.
Exceeding expectations
According to Preqin, for the vintage years 2013 and 2014, real estate funds outperformed all other private capital asset classes globally, with median net IRRs of 14.3% for 2013 funds and 12.2% among 2014 vintage vehicles.
As a result of recent strong performance, 88% of investors felt their real estate investments had met or exceeded their expectations in 2017, and 91% felt the same about their portfolios over the past three years.
However, 48% of fund managers and 50% of investors now believe the real estate market is at a peak going into 2018, which may impact future returns.
'This does not mean the real estate industry is set to lose its lustre for investors,' said Senchal. 'The majority still intend to commit at least as much capital to the asset class as they do currently, both in 2018 and over the longer term.'
He added: 'It is also worth noting that performance relative to expectations may remain on course: investors value factors beyond headline figures, such as diversification, inflation protection, low correlation and risk adjustment. The high point in the market may mean that top-level returns in the years to come may not match current levels, but real estate is likely to play an important role in investors’ portfolios nonetheless.'
