Investor appetite for value added real estate funds declined following the economic downturn in 2008, while interest for lower-risk core funds saw a marked increase. Although higher risk strategies such as opportunistic and distressed remained attractive to institutions committing to private property funds, the dominant preference among active investors was to focus on lower-risk strategies. More recently, however, there has been renewed institutional investor interest in value added vehicles and a shift away from core investments. Improved fundraising for value added strategies in 2012 suggests that investors may be returning to what was previously one of the most commonly targeted strategies in the private real estate fund market.
Increasing Appetite for Risk
Investor sentiment towards private real estate continually changes with market conditions. When property valuations dropped in 2008-2009 and the performance of higher risk-return profile funds in particular suffered, many institutions pursued the perceived safety of lower-risk core vehicles and value added funds fell out of favour with many investors. We are now witnessing the opposite pattern; investor appetite for core funds declined between January 2011 and January 2013, whereas investor appetite for value added vehicles increased during the same period. Value added vehicles are the most sought after fund type by investors that will be investing in real estate funds in the 12 months from January 2013, with 55% of active investors looking to add value added funds to their portfolios in the coming year, up from 46% in January 2011 and 47% in January 2012.
Renewed investor appetite for value added funds has driven increased fundraising levels for the strategy in recent years. An aggregate $11bn was raised by 36 solely value added vehicles that held a final close in 2012, the most successful year for value added fundraising since 90 vehicles raised an aggregate $28bn in 2008.
Appetite for higher risk-return profile investments is increasing among institutional investors, and for value added funds in particular. This may be a result of the improving performance of such funds, combined with concerns that the core property market is overheating. In addition, many investors in private real estate are looking to target higher returns in order to meet their overall returns target. With 55% of active investors looking to invest in value added vehicles over the next 12 months, it seems likely that fundraising for value added funds will continue to improve in the coming months.
Nonetheless, with a large number of funds on the road and many investors still holding back on fund commitments, real estate fund managers with value added funds in market will likely still find raising capital for their vehicles challenging. Even with increased investor appetite for value added funds, fund managers seeking capital for value added investments will have to work hard to convince investors that their fund represents a compelling opportunity.