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Investors in First-Time Private Real Estate Funds Continue to Diversify Strategies – April 2014

by Brian Chung

  • 29 Apr 2014
  • RE

Preqin’s Real Estate Online service currently tracks 263 investors actively investing or considering investing in first-time private real estate funds. These investors have combined total assets under management of approximately $5.2tn. Although many investors in real estate are likely to be under-allocated to the asset class, investors in first-time funds are more likely to be at or above their target allocation. The average current allocation of these investors to real estate is 13%, compared to an average target allocation of 11%. 

Among investors actively investing in first-time funds is the $27bn public pension fund, State of Connecticut Retirement Plans and Trust Funds (CRPTF). It has recently approved a commitment of $50mn to Cypress Acquisition Partners Retail Fund, a value added and opportunistic vehicle focused on US mixed-use, retail and shopping center properties. Additionally, New Mexico Educational Retirement Board recently committed $25mn to Hammes Partners II, the first institutional fund offering from Hammes Company. 

These investors in first-time real estate funds appear to be diversifying their strategy preferences, as each strategic preference has seen percentage increases since August 2013. Value-added and opportunistic vehicles are currently targeted by 85% of investors. Core funds are favoured among 68% of investors, while core-plus vehicles are utilized by 62% of investors compared to 52% of investors in August 2013. Debt vehicles remain attractive to 59% of investors, compared to 52% in August 2013, as well as distressed funds at 55%, up from 47%. Twenty percent of these investors consider a fund of funds strategy, while secondaries continue to be the least favoured strategy, with only 15% of first-time fund investors pursuing these vehicles. 

With regard to geographic preference, 76% of LPs that invest in or consider first-time funds will consider investing in North America. Seventy-five percent of investors display an appetite for Europe-focused funds, while Asia-focused funds are utilized by 64% of investors, up from 57% in August 2013. Forty-two percent of investors are allocating capital to funds globally, while funds targeting regions and economies outside of North America, Europe and Asia are being considered by 24% of investors in first-time private real estate funds. 

Of those investors that invest in or consider first-time funds, 61% are located in North America. Thirty-two percent of investors in these funds are located in Europe, with 3% in Asia and the remaining 4% based in other regions such as Central and South America, Australasia, Africa, and the Middle East. 

In conclusion, LPs that invest or consider investing in first-time private real estate funds are typically larger, more experienced investors with significant internal resources and due diligence capabilities. This enables these investors to possess more diverse real estate portfolios concerning the types of funds they will consider, often considering a range of strategies and geographies with regards to fund selection.

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