Following on from Part 1 of this blog, which discussed consultants and investors’ preferences towards regional investments and fund strategies, Part 2 continues by examining consultants’ capital outlay expectations over the coming year, and the key issues currently facing the private real estate market.
When asked about their expected levels of capital commitments over the coming year in Preqin's September 2012 survey, the majority of investment consultants responded that they expected capital committed to private real estate funds in 2012 to end up exceeding the amount they committed in 2011. Sixty-nine percent of consultants will either be significantly or slightly increasing their commitment level to private real estate, or will be investing in the asset class after having not invested in the previous year. Among those consultants which expected to increase their commitments this year as of September 2012, a notable 47% will make slightly more capital commitments in 2012 in comparison to 2011.
With many investment consultants looking to make new private real estate commitments on behalf of their clients in the near future, these consultants can be an important target group for fund managers looking to raise fresh capital commitments. A slightly larger proportion of investment consultants expected to slightly reduce their level of commitment to the asset class this year, with 11% stating so this year compared to 9% in 2011. However, no consultants will be making any significant reductions. In a similar study of institutional investors, Preqin found that 37% of investors expected to commit more capital in the next 12 months.
When asked about the key issues facing the real estate market, the valuation of investments has again been named by private real estate investment consultants as the single most important issue, with almost a quarter (24%) of consultants citing this as the most prominent issue facing those investing in the asset class. The economic climate and the resulting volatility was named by 22% of consultants as the single most important issue facing investors in the private real estate market. Market illiquidity and levels of leverage and debt financing were two other issues given equal importance by surveyed consultants, with each rated as the single most important issue in the market by 16% of private real estate investment consultants. Industry regulations, strategy-to-market fit, and fees/terms and conditions were cited by the smallest proportion of investment consultants as the single most important issue in the private real estate market, with each issue named by only 2% of investment consultants.
The results of the 2013 Preqin Alternatives Investment Consultant Review are encouraging for many fund managers, with consultants and their clients expecting to invest more capital in private real estate funds in the future. Within the consultant community, many view higher risk/return profile strategies as offering the best opportunities in the current market, with core investments proving less attractive to many consultants. In the current tough fundraising environment, this will be encouraging news for fund managers seeking capital for these types of funds. However, with lower risk investments remaining a focus for a large proportion of institutional investors, fund managers looking to raise capital for opportunistic and value added funds will likely struggle in the coming months.
While Europe’s economic challenges are well documented, investment consultants have growing confidence in the real estate investment opportunities that exist in the region; therefore, it seems likely that Europe-focused fundraising will increase in the coming year. However, for managers of Asia or Latin America-focused funds, fundraising could be extremely challenging, with consultants seemingly set to concentrate more on the established, liquid markets in North America and Europe than in previous years.