As one of the hardest-hit asset classes by the pandemic, the outlook had just begun to brighten for real estate before being struck again by the rise of inflation and weaker prices. In this uncertain environment, investors are likely to steer clear of the asset class and further weaken fundraising markets. Below, we look at the top three challenges managers face when raising capital from investors and provide key solutions to overcome them.
As one of the hardest-hit asset classes by the pandemic, the outlook had just begun to brighten for real estate before being struck again by the rise of inflation and weaker prices. In this uncertain environment, investors are likely to steer clear of the asset class and further weaken fundraising markets. Below, we look at the top three challenges managers face when raising capital from investors and provide key solutions to overcome them.
The negative effects of rising rates are evident in our data. Fundraising markets have clearly weakened significantly. Based on the first cut of our data for Q2 2022, the amount of capital raised has fallen by 32% quarter-on-quarter, and 11% year-on-year.
The future fundraising market may remain difficult to navigate. Preqin’s forecast model predicts real estate fundraising will total $170bn in 2024, and it’s unlikely that real estate fundraising over the next few years will touch 2021’s peak of $206.8bn. With this relatively weak fundraising activity, the outlook may not be as bright as it was when the last cycle was at a relatively early stage in its evolution.
Over a 12-month view, 38% of survey respondents to our investor survey in 2019 said they would increase their allocations to real estate, meaning we’ve seen a decline of nine percentage points over the past two years.
It's far from plain sailing for real estate fund managers of any level that have been spending longer on the road over the past two years. By the end of Q3 2021, 23% of funds closed had spent more than two years on the road, while the average time spent in market during the first three quarters of 2021 was 18.5 months.
This trend has clearly persisted over the first half of 2022, as showcased in our Quarterly Update: Real Estate, Q2 2022.
The fewer investors planning to allocate to the asset class, the harder it is for fund managers to source and identify the right LPs to approach. To overcome this, managers must focus both time and resources on reaching out to investors who are actively allocating capital to funds like their own. Building a target list based on the type of investors who are the most active in the asset class can be a good start. This can also help you reduce time spent on the road raising capital.
Preqin tracks over 10,200 LPs active in real estate globally via Preqin Pro. Request a demo today to see how our detailed profiles of large public institutions, individual family offices, and everything in between could help you achieve your fundraising targets.
To further narrow down your target list when fundraising, you can also prioritize LPs with mandates to invest in real estate funds like yours.
As of July 2022, Preqin tracks over 420 LP mandates and RFPs for the real estate asset class via Preqin Pro, with detailed plans on how they will allocate to the asset class over the next 12 months. See how this data could help you boost your fundraising activity by requesting a demo today.
Finally, focusing your efforts on approaching LPs who are currently below their target allocations for the asset class can increase your chances of success when fundraising. Separating LPs who are over-allocated to the asset class from the ones who are under-allocating against their targets will help to pinpoint the most suitable investors to approach.
Preqin Pro allows access to the industry’s most comprehensive private capital and hedge fund datasets and tools. With Preqin Pro, users can find investors searching for investment opportunities like their own. Be the first to know about new investor searches and mandates, and build your pitch with detailed information on investors' past activity and future plans. This way users are able to drive a successful outreach with details on key personnel and their preferred method of contact.
Preqin also publishes institutional research via the Preqin Insights+ subscription, providing analysis of investor sentiment through regular investor surveys, and exploring the fundraising environment across various markets.