How the Atlantic Divides Appetite for Core Real Estate Funds – September 2014

by Thomas Barker

  • 08 Sep 2014
  • RE

Preqin’s Real Estate Online service currently tracks over 1,700 institutional investors with an allocation to core vehicles, with 45% allocating more than $100mn to these funds. Core funds are among the lower-risk alternative investments, typically investing in well-leased properties in thriving metropolitan locations. By nature these vehicles deliver predictable returns, with the underlying properties exhibiting limited appreciation potential. In recent times, where heightened market volatility and regulatory changes concerning capital requirements have led to intensified scrutiny from stakeholders, the stability and liquidity offered by core funds makes them attractive to investors looking to diversify their real estate portfolios.

Europe has the strongest appetite for core vehicles, where 32% of real estate fund investors solely invest in core vehicles and 19% only pursue the higher-risk non-core strategies. Conversely, in North America, 15% of investors invest only in core funds and 41% utilize higher-risk vehicles. The data suggests a greater incidence of risk aversion within the Eurozone than is the case on the other side of the Atlantic, with unfavourable economic conditions across Europe possibly explaining the higher investor appetite for low-risk core funds. Of the Europe-based investors surveyed this year by Preqin which are planning on deploying capital to private real estate funds over the following 12 months, 54% are targeting core vehicles, compared to 31% in North America. Interestingly, in 2012, the gulf between Europe and North America was wider, with 78% of Europe-based real estate investors pursuing the low-risk strategy, almost double the 38% of North America-based investors at that time.

The data indicates a correlation between institutional investors’ assets under management (AUM) and real estate portfolio diversification. Of those with AUM of $20bn or more, 23% display a preference for non-core vehicles and 14% only utilize core funds. Investors with AUM of less than $500mn reveal the opposite trend, with 43% only considering high-risk vehicles and 28% only investing in core funds. This suggests that the larger investors show a preference for a more diverse range of strategies, with 64% investing in both core and non-core funds. In contrast, smaller investors typically focus on either the low-risk core vehicles or higher-risk value added and opportunistic strategies, with only 28% of these investors allocating capital to both types of real estate funds.

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