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Opportunistic Private Real Estate – High Risk, High Return

by Dhara Patel

  • 10 Aug 2018
  • RE

With investor appetite for higher-risk strategies increasing in their search for high returns, opportunistic private real estate funds are of growing interest: 47% of active investors were targeting opportunistic funds in June 2017 compared to 44% for core and 42% for core-plus. Corresponding with the growth in investor appetite for the strategy, fundraising for opportunistic private real estate funds in 2018 is on the rise. As at July 2018, 33 opportunistic funds have reached a final close for an aggregate $26bn, already representing 75% of the total capital raised in for the strategy.

Preqin’s performance data can help with asset allocation plans for LPs by analyzing the risk/return profiles of different strategies within the real estate asset class. The size of each bubble in Fig. 1 indicates the capitalization across all funds considered. Opportunistic funds attract the most capital  with a total capitalization of $303bn – more than double the total capitalization of value-added funds ($176bn) – with vintages between 2005 and 2015. Though value-added funds have generated the highest median return (+12.6%) for all funds considered, opportunistic funds have generated the second highest median return at 10.8%, showing the high-risk, high-return profile of the strategy.

 

PrEQIn Real Estate Quarterly Index captures the actual money-weighted return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private real estate partnerships. Having underperformed the public market for all consecutive quarters since March 2012, PrEQIn Opportunistic began to outperform the MSCI US REIT by 1.7 index points for the first time in September 2017 (Fig. 2). This gap grew in December 2017 to 4.2 index points, indicating the rise of the real estate strategy as well as the improvement in positive sentiment in 2018.

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