The cyclical peak in real estate continues to be a major fear for many institutional investors, but that has not deterred them from committing larger amounts of capital to riskier strategies, a survey by placement advisory firm Probitas Partners has found.

According to the firm’s annual Real Estate Institutional Investor Trends survey released this week, 62 percent of investors listed an approaching real estate market peak as their top concern in 2019. The effect of excessive capital chasing real estate assets on lowering returns and increasing risk was a close second, noted by 59 percent of institutional investors. Too much money chasing too few quality managers and funds was another key concern, cited by 27 percent of those surveyed.

These top-of-mind issues reflect institutional investors’ anxiety around the real estate market cycle and a lack of quality managers and funds. In fact, market cycle has continued to be a major concern for investors over the last two years, according to Probitas Partners’ managing director Kelly DePonte.

Today’s investors see a different landscape than the last peak in 2008, when credit problems in mature markets were listed as the top concern. In 2008, many respondents felt that the market was in a credit bubble and that large opportunistic closed-ended funds were using too much debt, DePonte said.

In 2019, however, investor concern is less focused on over-leveraged funds and more on the abundance of equity, as illustrated by the fundraising surge in 2018, he added. Capital raised for closed-ended funds rebounded in 2018 after two years of fundraising declines. Around $123.4 billion was raised for closed-ended funds in 2018, compared to $110.2 billion in 2016 and $97.4 billion in 2017, according to Probitas’ recent report.

However, DePonte clarified that increased capital commitment does not necessarily signal market optimism from investors.

“When managers come back to the marketplace and if they have performed well, it is hard for investors not to re-up,” DePonte told PERE.

Investor fears about too much equity in real estate leading to more risk are legitimized by increasing amounts of dry powder. With an estimated $295 billion in 2018, global real estate dry powder was at an 18-year high.

Even amid these cycle-related worries, however, investors also appear to be moving up the risk spectrum. Total capital raised for opportunistic real estate funds surpassed value-add funds in 2018. Global investors committed $35 billion to the higher risk-return strategy last year, compared with $30 billion for the value-add strategy. In 2017, value-add funds reigned, raising $36 billion compared with the $30 billion committed to opportunistic funds. Meanwhile, interest in core strategies has dropped dramatically over the last few years. The percentage of investors that said they were solely focused on core real estate fell from 22 percent in 2015 to 8 percent in 2019, according to the report.

Unable to justify paying fees and carry on core and core-plus funds in this lower return environment, larger investors with more staff and resources have been taking on more risk or pursuing direct investments for core assets, DePonte said.

The most popular response for drivers of investment focus for the next year was “investing in strategies with potential for downside protection,” according to the report. Meanwhile, re-upping with fund managers returning to market, and pursuing fund managers with the best track record, came in second and third, respectively.

As in previous years, investors selected management fees as the top issue regarding fund terms and structure, with 78 percent of survey participants listing it as a focus. Investors seeking lower investment costs to enhance returns has led Probitas to believe larger investors will increasingly pursue direct investments, separate accounts and joint ventures over commingled funds. Targeted leverage levels at 38 percent and carry distribution waterfalls at 27 percent were the second and third most cited issues by investors, respectively.