Those monitoring value-added and opportunistic private real estate fund performance across the globe would have been heartened to hear the latest findings of Swiss-based private markets investment firm Partners Group and news service Thomson Reuters from their recently-launched dedicated index.
The Thomson Reuters Private Real Estate Index, which was launched in February 2011 and provides performance data based on net cash flows and net asset values, found that its 300-strong sample pool of vehicles had returned 10.4 percent in 2011. That reflected a vast improvement on the return from the two investing strategies over the last five years of -2.9 percent.
Also, the 135 value-added funds included in the index performed remarkably better over the year than the 165 opportunistic funds it included – a 19 percent return versus a notably smaller 6.8 percent.
PERE caught up briefly with Michael Studer, Partners Group’s head of portfolio & risk management and a key figure behind the index, for some explanation:
PERE: What were the main factors underpinning the rebound to 10.4% in private real estate performance in 2011?
Michael Studer: First, the rebound came as a consequence of quantitative easing and interest rates reaching historical low levels in 2011. Cap rates in the real estate market are correlated to interested rates so the cost of debt financing decreased when interest rates were lowered. Since cap rates are reciprocal to property values, lower cap rates observed in the market led to the higher real estate valuations.
PERE: Why was there such a surge in value-added fund performance versus opportunistic fund performance?
MS: The current environment with an uncertain outlook on future economic growth is less favourable for the realisation of new development projects in real estate, which constitute a large proportion of opportunistic investments. Instead, it has been more attractive to buy existing properties, do modifications and operational improvements that increase the asset values. Therefore value-added strategies performed better in 2011 than opportunistic.
PERE: As you reported your findings, you admitted they were subject to an upward bias for reasons including managers opting to submit positive fund data only, ‘boom era’ funds being absent and no submissions from groups that have gone out of business. How will you ensure the data collection for the PGTR index looks less biased going forward?
MS: We will actively promote the index in order to increase the number of participants well beyond the current 300 mark and encourage investors to insist that their GPs contribute such that the industry at large benefits.