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Attracting Institutional Capital: Changing Investor Appetite for Private Real Estate – August 2014

by Olivia Harmsworth

  • 15 Aug 2014
  • RE

Recent years have seen investor appetite for private real estate fluctuate, with many institutions remaining cautious of placing new capital in the asset class due to an uncertain market. However, the last 12 months have seen considerable improvements in private real estate fundraising, with a total of $43bn raised in H1 2014, a 30% increase from the $33bn raised in H1 2013. This improvement has been driven by an increase in investor appetite for real estate, with the vast majority (82%) of fund managers surveyed by Preqin in May 2014 witnessing a significant or slight increase in investor appetite in the last 12 months, with just 4% seeing a decrease in appetite.

Correspondingly, when investors were asked in July 2014 whether they had committed to private real estate funds in the previous 12 months, 52% stated that they had, increasing from the 41% of respondents that stated so in December 2013. However, many investors remain wary of investing in the asset class, with just 34% of institutions planning to make new commitments in the next 12 months, similar to the 35% which stated so in December 2013.

Despite improving investor appetite over the last 12 months, fundraising is still a challenging prospect for many managers, with 68% of fund managers stating that there has been a significant or slight increase in competition for investor capital compared to 12 months ago. This is evident in the large number of private real estate funds on the road competing for investor capital. There are currently 463 private real estate funds in market, targeting an aggregate $161.7bn.

Investors are increasingly looking at experienced managers with a proven track record, meaning that fundraising for first-time or less experienced managers remains challenging. This can be seen in recent fundraising data as although the amount of capital raised in H1 2014 surpasses that of H1 2013, the number of funds reaching a final close declined from 112 to 80 over this time period, demonstrating that capital is increasingly concentrated among fewer managers. 

Improving market conditions and increasing investor appetite for real estate investment has contributed to a strong H1 2014, with fundraising showing considerable signs of growth and increasing proportions of investors making commitments to private real estate funds. Going forward, this looks set to continue, with many investors planning to make new commitments in the next 12 months. However, fundraising is still a challenging prospect for fund managers, with a large number of funds in market competing for capital and investors increasingly seeking managers with proven expertise. Those managers that can effectively listen to investors’ concerns and work to improve the flow of communication can help to ensure they will continue to be backed by their existing investors when they next come to market with a new fund.

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