Over half (52%) of investor respondents to an alternatives study have stated that they expect real estate performance to be better over the next 12 months compared with the previous 12 months, demonstrating a shift in investor sentiment toward the asset class.
Several findings have been made in an H2 private markets outlook report by Preqin, the data provider.
It said the mood was in stark contrast to the previous survey in June 2023, in which only 15% held the optimistic view. The more optimistic performance expectations may be contributing to the increasing interest in real estate secondaries, Preqin added.
Preqin said the influence of higher rates was clear in the real estate market and investors. Some 78% identified interest rates as a key challenge for generating returns – the same proportion as the June 2023 survey. Asset valuation was also identified as a major challenge, although the 50% of investors who said it was a concern is an 18% point drop from the previous year.
Yet almost half of respondents (44%) view the real estate market cycle as approaching the bottom, with 52% stating that they think performance will improve over the coming year.
Persistently high interest rates over the past year have affected the performance of real estate investments. In addition to increased illiquidity, landlords experience lower price expectations from potential buyers seeking higher yields to cover financing costs.
Some 66% of investors reported that asset prices were lower than 12 months ago, making it harder for their investment to achieve the expected returns. Over half (51%) of respondents think their investments have fallen short of expectations – a 26ppt increase from the June 2023 survey.
While the timing of a rate cut in the US remains uncertain after more than two years of interest rate hikes, central banks in major economies such as Canada and the European Union have begun lowering rates.
Preqin said this helped alleviate investors’ concerns and revive their sentiment toward real estate, influencing their asset allocation plans and strategy preferences.
The proportion of respondents planning to increase or decrease their allocations to real estate over the next 12 months is almost unchanged from the previous year. However, there is growing appetite for real estate investment in the longer term. Over one-third of respondents (34%) indicated their intention to increase their allocations, up from 25% in the June 2023 survey, while those considering a decrease dropped to only 9%.
Despite this positive trend, 49% of investors believe their portfolio assets are overvalued, indicating expectations of longer-term asset price recovery.
Core-plus and value add
Its latest survey also shows a renewed interest in core-plus and value-added strategies, which focus on acquiring built assets and adding value to achieve higher future exit prices. With expectations of a gradual rate cut that would compress the financing cost of acquiring properties, these strategies anticipate an improved exit environment and asset valuation for built assets.
The proportion of respondents considering core-plus and value-added strategies as the best opportunities in the next 12 months has increased by 16ppts and 9ppts, respectively, compared with the June 2023 survey, reaching 38% and 43%.
Another strategy gaining attention is real estate secondaries: the proportion of investors who identified this as one of the best strategies from their perspective increased by 17ppts from the previous year. Secondaries involve purchasing fund shares at a discount from shareholders who want to exit their investment within a predetermined timeline. This creates an upside potential resting on future easing exit environment.
Other asset classes
The report finds that almost half (49%) of surveyed investors globally consider private equity to be overvalued, as of June 2024. However, for context, the number of investors who believe that private equity is overvalued as of June 2024 is lower than in our June 2023 and June 2022 surveys, at 53% and 66%, respectively.
Looking at investors’ views on future private equity performance, 45% believe it will perform better over the 12 months from June 2024, compared to 26% believing so for the 12 months from June 2023.
Regarding private debt, 63% of investors see the asset class performing about the same over the coming 12 months compared to the previous 12 months, up from 37% in our June 2023 survey. However, 30% of private debt investors expect performance to increase over the 12 months from June 2024, compared to 53% stating so in June 2023.
The report goes on to highlight that infrastructure investors’ risk appetite is growing. Core-plus infrastructure funds are stated as offering the best opportunities for investors, as of June 2024, at 57% of respondents.
