As confidence has returned to real estate markets, so too have the lenders. While many banks retreated from real estate following 2008, fund managers are now finding it easier to access capital from these institutions. The vast majority (70%) of fund managers surveyed by Preqin believe that the availability of debt financing is better than it was 12 months ago, with just 5% stating that it is worse. European managers have seen the most change in this regard, with 82% of Europe-based fund managers stating that debt financing availability is better than 12 months ago, compared to 63% of North America-based fund managers. This suggests that lenders have largely now returned to the market and managers are able to secure the high levels of leverage often utilized for value added and opportunistic investments.
However, as a consequence of high levels of dry powder, increased levels of optimism in the real estate market, and the increasing ease with which managers can access debt financing, competition for assets is also increasing. The vast majority of fund managers have seen an increase in competition when seeking both core investments and value added or opportunistic assets, with 75% and 74% of managers stating so respectively. Fund managers based in Europe have seen the greatest increase in competition for core assets, with 77% stating so, compared to 63% of North America-based respondents. Additionally, 77% and 76% of Europe- and North America-based managers stated that competition for value added and opportunistic assets has increased, demonstrating that appetite for higher-risk investments is strong in both regions. While dry powder available for opportunistic and value added strategies has yet to return to the levels in 2009, the move up the risk return curve from many institutional investors has seen the equity available to invest in these strategies increase over the past 18 months.
Increasing levels of competition in the market may mean that fund managers need to cast the net wider to find value as asset prices are driven up, particularly for core and value added or opportunistic assets. Finding attractive opportunities appears to be becoming more challenging for many managers, with 47% of respondents reviewing more opportunities for each investment made when compared to 12 months ago, and just 11% reviewing fewer opportunities. The largest proportion of managers, 37%, are reviewing between 11 and 30 investments for each investment made, and 20% reviewing more than 50 opportunities per investment.
There are positive signs of growth in the private real estate industry. However, with increasing amounts of capital flowing into real estate as the availability of debt also increases, competition for the most desirable assets is high, driving valuations up and making finding value in real estate very difficult. In order to find the best value for their investors, many managers may be looking at a wider range of markets, and more secondary markets in particular, or be more likely to consider niche property sectors in order to attract opportunities that can generate the IRRs investors expect from private equity real estate.