The fundraising outlook for value-added and opportunistic real estate strategies is at its strongest level in the past five years, particularly as a significant amount of European capital is due to come stateside in the next 12 months.
“The next 12 months are going to be a very good 12 months for capital raising,” said Matt Khourie, chief executive of CBRE Global Investors, speaking at the EisnerAmper Real Estate Private Equity conference in New York this week. “I wouldn’t have said that any time in the last four or five years.”
Many foreign investors with a previously core focus have increased their risk appetite to core-plus, value-added and opportunistic. “I see, going forward over the next 12 months, a lot more interest in the enhanced risk space here in the US for foreign capital,” said Khourie.
Over the past 12 months, Korean investors have concentrated on gateway markets, but they are targeting yield and thus moving away from the trophy assets favored by the Chinese. German pension plans, meanwhile, also have been chasing higher returns with investments in second-tier markets in the US.
Aside from the Germans, however, “Europe for the last 12 months basically has been in hibernation,” Khourie said. “One big difference for the next 12 months versus the last 12 months is you’ll see a lot more European capital over here.”
Khourie noted that CBRE Global Investors recently landed a number of new separate accounts from German and other European investors, including a sizable mandate from Italy. “You’d think it’d be the last place where you’d find a big bucket of capital just looking to invest in real estate,” he added.
Currently, American institutions represent more than 70 percent of investors in so-called total return strategies, according to Paul Vosper, chief operating officer of Morgan Stanley Alternative Investment Partners, who also spoke at the conference. “American investors are just much further up the learning curve when it comes to using real estate as a private equity-style discipline versus the rest of the world,” he said. Moreover, “the use of total return strategies is recovering, and I think that predominantly will come from the US market.”
With a vast majority of European pension plans significantly underfunded, “we have perhaps a crisis pending, particularly on the Continent,” said Vosper. Income-based strategies, therefore, are becoming less attractive as a way for those investors to meet their financial obligations. It’s only a matter of time, he said, before the pension plans will be forced to shift into total return strategies if they are to be funded.
“The pension crisis in Europe is something we don’t think of that much,” said Vosper. “But it’s something that will be driving significant investment decision-making processes.”