Fundraising remained challenging in 2012 as a result of economic uncertainty, a lack of new commitments being made by investors and a large number of funds on the road. The 2013 Preqin Global Real Estate Report shows that closed-end private real estate funds that held a final close during the year raised an aggregate $55bn, a small decline on the $57bn that was raised by funds that closed in 2011. There were some notable fundraising successes, with 52% of funds that closed in 2012 doing so on or above target, including the $13.3bn final close of Blackstone Real Estate Partners VII, the largest closed-end private real estate ever raised.
For many firms however, securing commitments remained difficult. Fundraising is now a long process, with managers spending an average of just under 18 months marketing their funds. Raising a first-time fund is particularly difficult, with fewer investors now prepared to invest with new firms. Just 21% of investors will commit to first-time funds, compared with 41% in December 2009. More than ever, investors want to see evidence of a strong track record, and in particular that a firm performed well during the downturn, as well as in growing markets.
While the number of funds in market did fall during the final quarter of 2012, with 449 funds currently on the road targeting an aggregate $147bn in capital commitments, the fundraising market remains extremely crowded. Even with improving investor sentiment, there will likely continue to be a significant number of managers falling short of their fund targets or abandoning their fundraising efforts altogether.
There are signs that investor confidence in private real estate funds is returning, with 53% of investors surveyed by Preqin in December 2012 planning to make new commitments to the asset class in 2013. In a similar study conducted in December 2011, just 36% of investors expected to make commitments in the following 12 months. The majority (54%) of investors also expect to commit more capital to the asset class in 2013 than they did in 2012.
Real estate remains an important part of many sophisticated investors’ portfolios, with 93% of institutional investors active in the asset class targeting exposure to property of at least 5% of their total assets. As well as having the potential to generate strong returns, real estate portfolios can offer diversification, act as
an inflation hedge, and provide a steady income stream; we have seen only a very small proportion of investors scale down their exposure to the asset class. In the longer term, just 9% of investors expect to reduce their allocations to real estate, while 39% expect their allocations to increase.
While a large proportion of investors focused primarily on core investments following the downturn, many are now increasingly looking at opportunities higher up the risk/return spectrum. Investor interest in core remained strong during 2012, but there was also increased appetite for core-plus, value added and opportunistic strategies. Real estate debt is also gaining more interest from investors, with a growing proportion believing it can add value to their real estate portfolios.
The use of separate accounts is also continuing to increase, with some investors viewing this as a way to invest significant amounts of capital, while retaining a greater level of control than they might have with a commitment to a blind-pool fund. These typically remain the preserve of larger, more experienced investors however, and many small- or mid-sized investors lack the additional resources required to invest through separate accounts.
Recent performance of the real estate asset class is also encouraging. Preqin’s latest study of the performance of public pension funds’ portfolios found that their real estate investments generated a median return of 10.0% in the 12 months to June 2012, more than any other major asset class. In each of the nine quarters to June 2012, there was an average increase in NAV for private real estate funds and there are positive signs for private real estate funds of more recent vintages. The median IRR of 2009 vintage funds stood at 12.9% as of June 2012, with three-quarters of funds generating IRRs of 9.5% or more.
This must of course be placed in context; many investors suffered significant losses in 2008 and 2009 and despite the improvements in recent quarters, many are still disappointed with the returns they have received. Forty-seven percent of investors surveyed by Preqin in December 2012 felt the performance of their private real estate portfolios had fallen short of their expectations.
Outlook for 2013
Fundraising looks certain to remain challenging in 2013. There are signs of improving investor appetite, with a growing proportion of institutions expecting to commit capital to private real estate in the coming year; however, a significant proportion still do not expect to be active. While a dramatic increase in fundraising is unlikely, 2013 may see more capital raised than was secured in 2012. Firms marketing new vehicles will need to demonstrate a strong track record, have competitive fee structures and an alignment of fund manager and investor interests, and be able to clearly differentiate themselves from the competition in order to be successful.