PE Fund Managers Plan to Spend More on CRE

LONDON—Even as a broader cross-section of institutions has expressed some reservations recently about commercial property in the near term, private equity real estate managers remain true blue. A Preqin survey of over 180 real estate fund managers finds that two-thirds of firms intend to deploy more capital over the next 12 months compared to the previous year, while nearly half are planning to invest significantly more.

Preqin notes that while fund managers have record levels of dry powder at their disposal—an aggregate $250 billion as of February—this has led to increased levels of competition, and placed pressure on asset pricing. Survey respondents said they've seen the greatest uptick in competition for lower-risk assets, with 55% of firms stating that competition has increased, compared to 41% that say the same of opportunistic assets. Managers see valuations as a key concern for the year ahead, with 52% rating it as their chief concern, and many have reduced their performance objectives as a result.

“Recent years have seen real estate fund managers generate the strongest returns of any private capital asset class, and distribute record levels of capital to investors,” says Andrew Moylan, London-based head of real estate products at Preqin. “Deal flow has accelerated in the past few years, and fundraising remains robust. Furthermore, investor sentiment remains high in the longer term, and many are looking to expand their real estate investment portfolios.”

Although there are growing concerns in the real estate sector around the pricing and availability of assets, as well as the record levels of uncalled capital that fund managers have available, “most firms remain confident they can find value in the current market,” says Moylan. “The majority of fund managers expect to put more capital to work in 2017 in order to capitalize on this, even if they have to adapt their strategies or lower their return expectations as a result of current challenges.”

Accordingly, Preqin's survey found that 42% of surveyed managers have said that the level of competition has caused them to alter their investment strategies. Some managers have had to change their geographic focus to consider different markets, increase their investments in higher-risk strategies in order to provide higher returns to investors, or turn their focus to niche assets such as student housing.

Higher asset valuations are also having an effect on targeted returns, Preqin says. Forty-seven percent of survey respondents said they've had to reduce targeted returns for funds they are bringing to market, while only 10% of respondents said they'll be increasing their targets.

LONDON—Even as a broader cross-section of institutions has expressed some reservations recently about commercial property in the near term, private equity real estate managers remain true blue. A Preqin survey of over 180 real estate fund managers finds that two-thirds of firms intend to deploy more capital over the next 12 months compared to the previous year, while nearly half are planning to invest significantly more.

Preqin notes that while fund managers have record levels of dry powder at their disposal—an aggregate $250 billion as of February—this has led to increased levels of competition, and placed pressure on asset pricing. Survey respondents said they've seen the greatest uptick in competition for lower-risk assets, with 55% of firms stating that competition has increased, compared to 41% that say the same of opportunistic assets. Managers see valuations as a key concern for the year ahead, with 52% rating it as their chief concern, and many have reduced their performance objectives as a result.

“Recent years have seen real estate fund managers generate the strongest returns of any private capital asset class, and distribute record levels of capital to investors,” says Andrew Moylan, London-based head of real estate products at Preqin. “Deal flow has accelerated in the past few years, and fundraising remains robust. Furthermore, investor sentiment remains high in the longer term, and many are looking to expand their real estate investment portfolios.”

Although there are growing concerns in the real estate sector around the pricing and availability of assets, as well as the record levels of uncalled capital that fund managers have available, “most firms remain confident they can find value in the current market,” says Moylan. “The majority of fund managers expect to put more capital to work in 2017 in order to capitalize on this, even if they have to adapt their strategies or lower their return expectations as a result of current challenges.”

Accordingly, Preqin's survey found that 42% of surveyed managers have said that the level of competition has caused them to alter their investment strategies. Some managers have had to change their geographic focus to consider different markets, increase their investments in higher-risk strategies in order to provide higher returns to investors, or turn their focus to niche assets such as student housing.

Higher asset valuations are also having an effect on targeted returns, Preqin says. Forty-seven percent of survey respondents said they've had to reduce targeted returns for funds they are bringing to market, while only 10% of respondents said they'll be increasing their targets.