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Cornell, Hodes Weill: Private RE fund investments have ‘rebounded’

Around 60 percent of institutions are actively investing in real estate private funds compared to 48 percent in 2012, according to research out this week by Cornell University’s real estate programme and New York-based advisor, Hodes Weill & Associates.

Investments in private real estate funds have rebounded this year with around 60 percent of institutional investors actively committing capital to vehicles compared to 48 percent in 2012, according to research from Cornell University’s Baker Programme in Real Estate and advisory firm, Hodes Weill & Associates.

Conclusions from the pair’s 2013 Institutional Real Estate Allocations Monitor published this week suggest several key trends, all of which are positive for the private equity real estate industry.

Cornell and Hodes Weill received answers from 198 institutional investors to questions on current and future plans when it came to private funds, direct investments, real estate securities, real estate debt, lending, separate accounts, joint ventures, and real assets. The respondents represented more than $7 trillion of AUM and $400 billion in real estate and included investors AP-Fonden 2, AT&T Pension Fund, Church Commissioners for England, Future Fund, GIC Private Limited, Hermes Real Estate, IBM Retirement Fund, Future Fund, National Pension Service of Korea, San Francisco City & County ERS, National University of Singapore and The Board of Regents of the University of California.

The study – released yesterday – said investors were “significantly under-invested in real estate, resulting in greater capital flows into the sector. On average, portfolios are 8.8 percent invested in real estate – approximately 100 basis points below the average target of 9.8 percent- and institutions expect to increase their target portfolio allocations by an average of 52 basis points in 2014, which is particularly pronounced in the Asia Pacific region.

But crucially for private equity real estate, approximately 60 percent of institutions are actively increasing investments in private funds, which is up by 12 percent on 2012. And, 60 percent are seeking value add or opportunistic strategies. That is against the 43 percent seeking core investments.

“Notwithstanding recent headlines about institutions internalizing portfolio management functions, the substantial majority of institutions intend to outsource new investment allocations to third-party managers,” said the report. “We found this trend to be consistent across institutions of all sizes, contrary to conventional wisdom that suggests larger institutions are relying less on third party managers.”

Public pensions, endowments and foundations are the most active users of third-party managers, with a substantial majority outsourcing all of their assets to managers. This is due to lack of staff relative to AUM and a global focus. Not surprisingly, insurance companies were more likely to manage assets internally given larger staff and more focus on core and lower yield investments.

The study also found 70 percent of institutions were considering allocations to new third-party manager relationships.

The report has broad positive implications for transaction volumes, fundraising, lending activity, and property valuations. It also follows PERE’s Sentiment Survey carried out by PERE Research and Analytics that found private real estate fundraising was recovering, albeit slowly, and that investor sentiment towards the asset class was holding firm. It also found that while investors wanted greater control over investments, commingled funds were “not going away”.

Speaking at PERE’s Global Investor Forum in Amsterdam in October, Dan Gunner, director of Research and Analytics at PEI – the parent company of PERE – said: “We can see that the pre-crisis days of 2008 are a long way away in terms of capital raised and funds closed but we are experiencing a gentle and steady recovery year-on-year in terms of capital raised.”

Having received responses to the survey from 90 investors, Gunner added: “On average, each quarter of 2013 has surpassed the levels of capital raised in the corresponding quarter of 2012 by $4.3 billion. 2013’s full year number will probably be the best since 2008 but only just. But the number of funds closed has fallen and it’s clear that, as a proportion, larger funds are taking a larger slice of LP capital.”

In separate research to The Cornell University and Hodes Weill survey , Hodes Weill found for $1 billion-plus funds, the pace of fundraising had not altered between 2012 and 2013 with each taking on average 18 months to reach final closing. However, funds in 2013 on average raised 25 percent in excess of their targeted total raise – a significant increase on 2012.