The vast majority of private real estate fund managers based on the US West Coast are first-time managers, with 69% of firms having raised only one fund or having only one fund in market. In terms of strategies, these firms favour opportunistic and value added investments, with 66% and 80% utilizing each strategy respectively, demonstrating these managers’ appetite for risk. Only 23% and 26% of these firms will invest in core and core-plus strategies respectively.
As a consequence of a move up the risk/return curve from both investors and managers, competition for value added and opportunistic assets appears to have increased considerably. The chart below shows that when managers were asked, as part of a recent Preqin fund manager survey, whether there had been any change in competition for assets, 85% of West Coast-based managers stated that competition for value added/opportunistic assets had increased, compared to 58% stating so for core assets. No managers believed that competition had decreased, indicating that firms are finding it harder to source suitable investment opportunities across the risk spectrum. With 46% of West Coast-based managers planning to invest more capital in real estate assets in the next 12 months compared to the previous year, firms may find that increased competition continues to push up asset prices, making it harder to find value in the current market.
Encouragingly, West Coast-based managers appear to be positive regarding institutional appetite for private real estate investment; the recent fund manager survey revealed that all West Coast-based firms surveyed believe that institutional investor appetite has increased or significantly increased over the past year, with none stating that they had seen a decrease.
Although this seems particularly positive for managers raising West Coast-focused funds, the vast majority (77%) of fund managers also stated that competition for investor capital has increased or significantly increased, with none stating they believe there is a decrease in competition for capital. Investors are becoming increasingly discerning as to which managers they place capital with, with manager experience and performance often the key attributes that investors are looking for prior to making a fund commitment. As a result, capital is increasingly concentrated among fewer, more experienced managers, meaning that those managers without a previous track record to demonstrate to institutions may find it challenging to attract capital. With a large proportion of West Coast-based managers having raised only one fund or having only one fund in market, these firms will need to demonstrate to investors that they have the ability to source value in this competitive market, and will need a unique fund strategy in order to stand out from the crowd.