Ongoing economic uncertainty in the eurozone and global markets has made raising capital for investments in European real estate very challenging. Perhaps more significantly, the current fundraising levels in the European private real estate market appear to suggest that investor interest in the region remains fairly low. Preqin's survey of real estate investors at the start of 2012 in Preqin Investor Outlook: Real Estate, H1 2012 showed that only 33% of investors surveyed planned to target investments in Europe in 2012.
However, alternatives investment consultants active in the private real estate universe have expressed a different opinion on private real estate opportunities in Europe. Within the private real estate asset class, a significant proportion of investors (51%) employ the services of an investment consultant to assist in fund selection, making these consultants an important group to consider when assessing the current private real estate market. Preqin recently surveyed 80 alternatives investment consultants from around the world in the 2013 Preqin Alternatives Investment Consultant Review; collectively, these consultants have over $1.5tn worth of alternative assets under advisement.
Forty-six percent of consultants interviewed stated that they believe there are good opportunities for investment in Europe. This is an increase from the 38% which expressed the same opinion in 2011. While many investors have been reluctant to invest in Europe given the ongoing uncertainty, it is clear that consultants expect there to be good opportunities in the region in the coming months, with more distressed opportunities and an expanding debt fund market. These results suggest consultants may recommend that their clients make more commitments to Europe-focused funds over the next few months. With investment consultants acting as important gatekeepers for such a significant proportion of private real estate investor capital, exploring their opinions about investment opportunities across various strategies and geographies can provide an insight into the current private real estate market and outlook for the asset class.
The dominant opinion among investment consultants is that the more established markets present the best opportunities at present, and there is less interest in real estate in emerging economies. Over two-thirds (68%) of consultants named North America as the region presenting the best opportunities, a proportion which remains unchanged since 2011. In contrast, sentiment towards emerging markets has dropped significantly. Investment consultant appetite for Asia dropped from 51% of surveyed consultants naming the region as presenting good opportunities in 2011 to 24% in 2012.
The proportion of investment consultants naming South America as a region with good investment opportunities fell from 35% in 2011 to 16% in 2012. Preqin’s most recent research shows that core funds remain one of the most commonly targeted strategies; however, appetite for this strategy seems to be declining. Over half (53%) of institutional investors searching for funds in Q4 2012 are targeting core funds, with the same proportion targeting value added funds and 47% targeting opportunistic strategies. As of Q2 this year, 58% of investors searching for new funds were targeting core strategies, a larger proportion than the 51% and 44% that were targeting value added or opportunistic investments respectively. However, this may continue to change in the coming months as many investment consultants believe that the better opportunities are in funds with higher risk/return profiles.
In the 2013 Preqin Alternatives Investment Consultant Review, investment consultants were asked to rate which real estate fund types present the best investment opportunities on a scale of one to five, with five representing the most attractive opportunities and one representing the least. Investment consultants view core as one of the least attractive strategies, with the fund type receiving an average ranking of 2.7. Instead, investment consultants ranked opportunistic as the strategy presenting the best opportunities, with an average ranking of 3.3.
Opportunistic was ranked slightly higher than the other highly ranked strategies of debt, distressed private real estate, and value added, all of which have an average ranking of 3.1. Some commentators have suggested that the increased demand for core assets has meant these are now overpriced, and it seems that consultants now believe there are better opportunities elsewhere. However, many investors remain extremely risk-adverse and it may prove difficult to convince these institutions to move up the risk/return ladder.
In part two of this blog, find out about consultants’ views on capital outlay and key issues facing the real estate market.