During June and July 2012, Preqin conducted a series of extensive interviews with over 100 institutional investors in private real estate. We asked study participants what they thought were the key issues facing the private real estate fund market, and whether the performance of their private fund investments had met their expectations.
Many investors consider the general economic environment the main issue affecting the real estate fund market, with 38% of investors interviewed citing it as a key issue. The economic downturn heavily affected the real estate industry, and investors are still highly conscious that the uncertain economic climate could continue to have a negative impact on their investments.
Investors named a number of other key issues that they think the private real estate fund market is facing. Many investors feel that valuations are an issue, with 23% of investors naming this area. Fifteen percent consider fees and the alignment of interests between investors and fund managers to be a key issue, suggesting that fund managers still have work to do to structure their funds in a way that ensures investors are convinced that their interests are aligned with those of the fund manager. Real estate fund performance was a key issue for 10% of investors, and liquidity, leverage, and regulations were each raised as issues by 8% of investors. Lack of liquidity can be an issue, especially for smaller investors, and some LPs may feel that ultimately the performance of private real estate funds does not justify their illiquidity.
The majority of investors interviewed (64%) said that the performance of their real estate fund investments had met their expectations, while 27% percent of investors felt that performance had fallen short. Just 9% of investors interviewed felt that the performance of their private real estate fund investments had exceeded their expectations. Despite the many challenges faced by the real estate fund industry in recent years, more investors appear to have been satisfied with the level of performance of their real estate fund investments than those that have been disappointed by them. However, the fact that more than a quarter of investors (27%) are disappointed with returns indicates there is more work for fund managers to do in regaining investor confidence sufficiently to improve fundraising conditions.