Following the Global Financial Crisis, real estate has consistently been ranked as one of the best performing asset classes within the alternatives industry: in recent years, fund managers have returned significantly more capital to their LPs than they have called up each year. This consistent movement of capital has cultivated a healthy fundraising environment for managers, which in turn has caused annual capital raised figures to increase in near-linear fashion between 2009 and 2015 (Fig. 1).
However, after 2015 the picture changes as fundraising figures deteriorate. While overall real estate fund performance has remained relatively strong, it appears the rate at which these funds are performing is slowing.
Preqin’s Private Capital Cash Flow tool features quarterly transactions for over 4,300 unlisted funds since inception, 660 of which are closed-end private real estate funds. Using this data, it is possible to calculate horizon returns – a standard method of examining performance over a defined period. This is calculated by using the fund’s net asset value at the beginning of the period and capital calls as negative outflows, with distributed capital and the period-end net asset value serving as positive inflows.
Fig. 2 shows the rolling one-year horizon IRRs between 2013 and 2017. One-year growth over this period appears to peak at 23.9% between September 2013 and September 2014, and has since continued to exhibit a net downwards trend. Investors surveyed for the Preqin Investor Outlook: Alternative Assets, H1 2018 have had a change in confidence in the ability of real estate to achieve objectives over the past 12 months: only 8% claimed their real estate commitments have imbued them with increased confidence.
Apparent poorer performance could also be attributed to the growing difficulties managers are facing in finding attractive opportunities to place capital. A large proportion of real estate managers are intending joint ventures with other alternative asset managers to form a significant part of their strategy in the next five years, which could potentially grant them access to search for opportunity within larger deals.
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