Preqin’s Real Estate Online service currently tracks 543 institutional investors investing in private real estate funds with a distressed strategy. These LPs have aggregate assets under management of more than $11tn and on average, currently allocate 7% of total assets to real estate, which is below their average target allocation of 8%. This suggests that investors will continue to commit capital to the asset class to reach their target allocations. This is particularly encouraging for managers raising distressed private real estate funds, and will help to further bolster fundraising for this strategy. In 2014 so far, five distressed funds have reached a final close, raising a considerable $8.2bn in investor capital. This continues the growth seen in 2013, when 15 distressed funds closed raising an aggregate $12.3bn, compared to just $3.9bn raised by 22 funds in 2012.
The top five states with the most investors committing to distressed real estate funds are California (14%), New York (10%), Illinois (7%), Massachusetts (6%) and Pennsylvania (6%). Public pension funds represent 24% of these investors and 22% of these LPs are private sector pension funds. Foundations represent 19% of distressed real estate fund investors and endowments account for 15%.
US distressed real estate fund investors also allocate capital to direct investments in real estate, as well as publicly listed real estate funds. Investors with a preference for private funds only represent 52% of these LPs. Firms also investing in public real estate funds such as listed REITs, account for 36% of investors and 23% also invest a portion of their allocations to real estate through direct investments in properties.
Encouragingly, a number of these investors are known to be considering commitments to private real estate funds in the next 12 months. Of US-based investors in distressed funds, 78% will seek funds targeting domestic assets. Europe-focused funds will attract 35% of future investors and funds targeting the Asian property market will draw 18% of these LPs.
An example of an investor planning to commit capital to distressed private real estate funds in the next 12 months is the City of Memphis Retirement System. The public pension fund will commit up to $110mn to distressed, value added and core private real estate funds in the next 12 months. The Tennessee-based pension fund will consider existing fund managers in its portfolio as well as GPs it has yet to work with. The pension fund maintains a target allocation of 10% and is currently under-allocated at 5% of its total assets.