Private Equity Real Estate Managers Reduce Targeted Returns Due to Asset Valuations – July 2016

by Andrew Moylan

  • 29 Jul 2016
  • RE

A Preqin survey of 191 private equity real estate fund managers found that asset valuations remain a chief concern for firms, with 49% seeing them as the biggest challenge over the next year. An equal proportion noted an increase in competition for assets compared to 12 months ago, while the majority (58%) of respondents think that it has become harder to find attractive real estate assets over the past 12 months. As demand increasingly outstrips supply for attractive investment opportunities, 63% of real estate managers have seen an increase in asset pricing, and over a third (35%) believe they have risen significantly.

Due to these challenging buy-side conditions, the majority (51%) of private equity real estate fund managers surveyed have reduced the targeted returns of their funds in market, with just 11% increasing their performance objectives. Mid-market managers are seeing the greatest pressure on returns: 67% of firms with $500-999mn in assets under management (AUM) have reduced their targeted returns, while just 5% have raised their performance objectives. Larger real estate fund managers ($1bn or more in AUM) are the most likely of any size group to maintain their targeted returns, with 53% either maintaining or increasing their performance goals regardless of asset valuations or competition.

The private real estate market remains highly competitive in terms of securing attractive assets. With record levels of dry powder, and institutional investors increasingly looking to invest directly within the asset class as opposed to through fund managers, nearly half of all surveyed real estate firms state that there is more competition in the market for deals than the previous year.

This evolution of the industry is consistently moving in favour of those firms with the resources and manpower to override market competition. Smaller and less experienced fund managers may struggle to participate in such a costly marketplace, which has forced many mid- and small-market managers to downgrade their targeted returns.

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