Preqin’s Real Estate Online tracks 236 private real estate funds in market with a stated target net IRR percentage, the largest proportion (23%) of which are targeting a net IRR of between 14% and 15.9%. The chart below displays the distribution of average target IRRs for private real estate funds in market, with the exception of funds in the highest bracket; 14% of funds in market are targeting IRRs greater than 20%. Contrastingly, 10% of funds in market are targeting IRRs of less than 10%.
Target net IRRs vary according to the fund strategy; the large proportion (60%) of funds targeting a net IRR of 12-18% is reflected in the number of funds targeting a value added investment strategy (99). Core private real estate funds in market have the lowest target IRRs, with an average of 11%, due to their relatively low degree of risk. Opportunistic funds in market have the highest target IRRs, with an average of 19%, owing to the higher degree of risk associated with the development.
Target net IRRs are also shaped by a fund’s geographic focus, with a higher rate of return expected for investment in developing or emerging markets, as these regions pose more risk. Geographically, funds in market with the highest target IRRs primarily target Asia and countries outside the traditional regions of North America and Europe, with average target IRRs of 17% and 19% respectively. Reflective of their relative safety, North America- and Europe-focused funds in market have lower average target IRRs of 16% and 12% respectively.
The property type preference of private real estate funds is also a contributor to determining the target net IRR, depending on whether the vehicle focuses on traditional or more niche assets; on average, office assets target lower net IRRs (12%), while land-focused vehicles target net IRRs of 30% to compensate investors the higher risk.