Private real estate investors preparing for choppier waters

Investors are wary that macroeconomic factors could threaten their performance in private real estate.

Private real estate investments performed well in the past year, but if the findings of the PERE Investor Perspectives 2019 survey reveal anything it is that investors are bracing themselves for tougher times ahead as several potential risks could threaten performance.

Nearly half – 46.8 percent – of investor respondents say their private real estate investments have met benchmarks over the past 12 months, while 41.9 percent say benchmarks were exceeded.

Core concerns

With an economic downturn likely to happen in the next few years, investors are wary of potential risks that could threaten performance. When asked which factors could slow down returns, 66.3 percent of respondents cited extreme market valuations, 56.1 percent are concerned about rising interest rates, and 33.7 percent are keeping a watchful eye on a US/China trade war. Cybersecurity threats and natural disasters, now well documented as growing global threats for all business sectors, are at the bottom of the list of concerns.

This is impacting the way investors see their real estate portfolios performing in the coming year with more respondents expecting their performance to fall below rather than exceed benchmarks. Only 17 percent think their real estate benchmarks will exceed expectations in the next 12 months, the lowest of all the asset classes surveyed, which include infrastructure, private equity and private debt. Some 20 percent of respondents believe performance will fall below benchmarks in real estate, higher than in any of the other alternative asset classes. And although 63 percent of investors are anticipating benchmarks will be met in the next year, overall, the expectations for private real estate are the lowest of all alternative asset classes. Investors are the most enthusiastic for their private equity portfolios; 50 percent feel private equity will meet their benchmarks and 41.5 percent that it will exceed benchmarks. A total of 87 percent think private debt will meet or exceed their benchmarks.

Maybe because of a somewhat pessimistic outlook, more investors responding to the Investor Perspectives 2019 survey are planning to decrease their target allocation to private real estate than to any other asset class. Within private real estate, most investors plan to maintain their target allocations to the different sub-strategies.



Value seekers

Real estate investors are shunning core-plus, with 18.7 percent planning to decrease their target allocation to it. There is slightly more confidence in value-add with 22 percent of investors planning to increase their target allocation to the strategy over the next 12 months.


Exploring secondaries

While the secondaries market is reaching new proportions, with $80 billion in volume in 2018, up 31.3 percent from the previous year, real estate deals have dropped 8.3 percent to $5.8 billion, according to Setter Capital. This more subdued embrace of real estate secondaries is showing in the survey, too.

Less than 10 percent of investor respondents plan to commit to real estate secondaries funds in the next year, far lower than to private equity funds (47 percent). Nearly three-quarters of investors do not plan to commit to real estate secondaries funds at all over the next 12 months.

Similarly, the overall participation of investors in the private real estate secondaries market as sellers or buyers remains lower than in private equity secondaries. Fifty-eight percent of respondents plan neither to buy nor sell real estate secondaries in the next 12 months. Only 6 percent plan to both buy and sell real estate fund stakes, compared with 21 percent planning to buy and sell private equity stakes.

One final interesting wrinkle to highlight from the survey results is that investor respondents say they will be the most active sellers when it comes to private real estate fund interests, at 4.9 percent, compared with 4.7 percent in private equity.