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COMMENT: Behind the headlines

The Investor Intention surveys published by INREV, ANREV and PREA this week celebrated increased allocations to private real estate across the board, but the numbers were worth a closer reading.

Taken at face value, the deluge of data points offloaded this week by regional non-listed real estate investment associations INREV, ANREV and PREA in their collaborative Investment Intentions surveys pointed to a markedly rosy future.

With average private real estate allocations of institutional investors expected to rise to 10.3 percent from 9.5 percent, equating to the possibility of an additional $47.7 billion of equity flowing into global property markets, what’s not to cheer?

There were further subplots within the narratives presented this week to enjoy as well: swelling Asian money bursting to get into property markets, listed property shares being regarded by institutions as overvalued and the largest investors in the world up for taking on more risk.

Still, managers of value-added and opportunistic real estate funds should not break open the bubbly just yet. That is because there are other ways to interpret some of the findings of these reports.

Let’s start with where the capital is coming from. The most alarming statistic comes from INREV’s paper, which states that just 26.9 percent of North American investors expected to increase their allocation. Asia had the highest percentage (53.8 percent) keen to increase allocations, but the region is playing catch-up with its Western peers. Average allocations in the East currently are 6.8 percent and are expected to rise to 8.2 percent over the next two years – still below the average European and North American allocation. 

Historically, it has been the Americans that have embraced higher risk-return property funds. Meanwhile, more than half of Europe’s investors still prefer core real estate to value-added or opportunistic. There was more enthusiasm for value-added and opportunistic strategies in Asia, but then that is to be expected from the world’s biggest growth region.

Next, fund managers of higher yielding strategies increasingly are unlikely to ensnare the capital of the world’s largest institutions, which now fervently court joint ventures and club deals. The inference is that managers must woo smaller investors and, by definition, more of them to achieve the capital haul they might like.

That, however, does not apply to fund of funds. INREV noted that, going forward, 60 percent will increase their allocations to JVs and clubs. PERE has reported on many occasions over recent years on multi-managers whose latest investment vehicle has not made even one fresh fund commitment. Like certain large investors, multi-managers are becoming keener to cut out the expense of a fund manager and get straight to the underlying investment or operating partner.

Smaller, less resourced investors are now accepting that JVs and clubs are not possible for them. That is a small mercy for fund managers. In 2011, arguably the year when these were most popular, ANREV found that 57 percent of survey respondents wanted an increase to them compared to just 23.9 percent today. Conventional managers thus become the de facto alternative.

Is it worrying that ANREV found that 60 percent of its respondents identified achieving target returns to be their biggest challenge this year? With Asian allocations having to grow by so much, there’s a suggestion here that investors are resigned to capitalizing funds, even if they lack the faith that their strategic objectives will be realized.

Nonetheless, a lack of choice for LPs is another mercy for fund managers in capital-raising mode. In Europe, that was manifested by a lack of available products, with INREV finding that 55.6 percent of investors are worried more about a narrow vehicle choice than even alignment of interest.

One final observation. ANREV noted how the percentage of investors wanting to up their listed real estate allocations this year has more than halved – 14.6 percent this year versus 30.6 percent last year. That was, of course good news, but was nonetheless representative of input from its own membership. The Asia Pacific Real Estate Association is poised to publish a paper of its own, which will note that 70 percent of investors it polled are expecting their REIT mandates to grow over the coming 24 months.

No doubt, this column amounts to looking at the glass half empty as an increase of 80 basis points for private real estate investment truly is a positive to be celebrated. However, understanding how that money will reach the property and, crucially, via what avenues means efforts in corralling capital can be channeled in the right direction and managers won’t waste their time chasing the wrong supporters.