Sentiment improves for non-listed fund vehicles

A growing number of investors are positive about non-listed real estate fund managers, according to fund data provider Preqin’s H2 2015 Investor Outlook.

Nine out of 10 institutional investors indicated that private real estate funds have met or exceeded their performance expectations in the past year and more investors are planning to increase their allocations than reduce them. ‘Despite high levels of dry powder, and concerns among investors about valuations and the potential impact on future performance, many are planning to commit significant amounts of capital to real estate,’ noted Andrew Moylan, head of real assets products.

Overall, some 78% of investors polled plan to invest as much or more capital in the next 12 months compared to the previous year, the survey found. In the longer term, 89% of investors plan to increase or maintain allocations.

The majority of investors surveyed – or 57% - were positive about their real estate portfolio, up from 37% in December 2014. Similarly, 80% of investors feel that their interests are aligned with those of fund managers, up from 70% at the start of the year. The majority of investors also reported that real estate funds met their performance expectations in the past year, while 39% felt they had exceeded them. Six months ago, only 33% of those polled felt performance had exceeded their expectations. Roughly a quarter of real estate investors target 8-9% annualised returns from their portfolio, while 40% of investors have return expectations of 10% or higher.

In recent years, appetite for private real estate separate accounts has grown enormously, reaching an all-time high of some $17.8 bn (€16.6 bn) in 2014. However, change appears to be in the air: a significant number of investors with separate accounts – 44% - and another 40% engaged in joint ventures, plan to reduce the amount of capital in these structures over the coming year. This is twice the proportion that aims to increase their exposure through such methods.

Positive sentiment is also being driven by investor satisfaction with the alignment of interests between investors and fund managers. Some 85% of those surveyed agree that fund managers and investor interests are properly aligned, six percentage points up from December 2014. However, a large proportion – or 85% - of investors have decided not to invest in a fund due to the proposed terms and conditions, indicating fund managers need to be sure they are aligned with market rates or can effectively justify the fees they charge if they want to ensure these issues are not an obstruction in gaining commitments from investors.

Some 63% of those polled expressed concern about valuations, with deal flow the second-biggest concern at 37%. ‘How fund managers address and mitigate these concerns could be the differentiator in a successful fundraise within the highly competitive fundraising environment,’ Moylan noted.