In fundraising terms, 2019 appears at first glance to have been something of a disappointment for private real estate, with the asset class registering its second-lowest figure for seven years at $135.27 billion. And the number of funds closed in 2019 has dropped off dramatically too – just 181 at year end, down from 337 in 2017. So, has the sheen been wiped from real estate? Are investors side stepping the sector? Not necessarily.
Recent PERE analysis of these year-end figures suggests simply that more capital is being concentrated in the sector’s mega-funds. And certainly, the findings of this year’s PERE Investor Perspectives 2020 Survey indicate a healthy appetite to allocate capital to the asset class in 2020, and optimism about its expected performance in the year ahead. Now in its second year, the survey aims to get to the crux of the challenges, issues, pain points and opportunities that investors will face over the next 12 months.
The following charts highlight the seven big themes that are front of mind for private real estate’s investors.
Underallocated to the asset class
When it comes to current allocations to the asset class, approximately one-third of private real estate investors polled for the Investor Perspectives Survey indicated they are at their target level. This is similar to the findings in last year’s survey, when 35 percent of respondents felt they had reached allocation targets. Perhaps more revealing, however, is that far more investors this year say they are currently underweight in the asset class – 32 percent in the 2020 study compared with 18.9 percent in the 2019 study. This notable proportion of investors leaves the market with a gap between current and target allocation, and sets investors up nicely to shift more capital into private real estate in the year ahead.
Demand for real estate
Given that a significant number of investors surveyed this year feel they are still under-allocated to the private real estate asset class, it may not come as much of a surprise to learn that the majority of those polled are planning to maintain or increase the amount of capital invested in the sector over the next 12 months. Thirty-five percent of respondents say they will look to increase capital commitments in the next 12 months, with a mere 9 percent expressing the wish to allocate less capital in 2020. Thirty-nine percent expect to invest the same amount in 2020 as in the prior year. These figures suggest positive investor sentiment toward, and a healthy level of confidence in, private real estate.
Reinforcing the previous positive sentiments revealed by the survey are the findings on expectations of performance. PERE asked investors to comment on how the private real estate asset class would perform their against benchmarks in the coming 12 months.
Nearly half of respondents reveal they expect their private real estate investments to meet benchmarks, while 19 percent of investors believe the performance of their private real estate portfolio will exceed benchmarks in 2020. Only 15 percent believe real estate investments will fall short of their expectations.
Loyalty defines relationships
Investors are moderately receptive to increasing the number of manager relationships for their private real estate portfolio – 33 percent of respondents are open to the idea in the year ahead compared with 37 percent in last year’s survey. And compared with sentiment for other asset classes, investors in private real estate are the most cautious about forming new partnerships – 41 percent are looking to ramp up the number of managers they work with in private equity and 40 percent are seeking to do the same in infrastructure.
The idea of allocating to first-time funds is not embraced either with 50 percent of respondents expressing no intention of doing so in the future, although 38 percent report they do so opportunistically.
Overall though, the asset classes capitalizers are a loyal bunch and stick with the familiar.
Overall, across all strategies, investors say they are most likely to maintain the amount invested or invest opportunistically. Changes across the fundraising landscape, such as a dip in the number of funds raised from 2013-19, have partly contributed to a slow-and-steady sentiment toward the asset class.
However, it is where investors are most likely to increase capital in the next 12 months that is most revealing – 30 percent intend put more capital to work through value-add and 23 percent through opportunistic. Debt is the third most popular strategy, with 21 percent of investors polled looking to invest more in 2020. This compares with just 11 percent for core and 17 percent for core-plus. Investors are willing to move up the risk curve to achieve higher returns.
Recession is a looming concern
Private markets do not operate in a vacuum, so we also asked investors their thoughts on the macroeconomic factors they believe will have the greatest impact on the performance of their investment portfolios in the year to come.
Investors anticipate a possible recession and a US-China trade war will have the greatest impact, followed by extreme market valuations. Availability of leverage, which can amplify possible returns but also multiply the potential downside risk in the event of the investment not going according to plan, also features. Threats in the form of Brexit, natural disasters and cybersecurity are cited as less likely to impact performance.
ESG and diversity failing to ignite
Arguably the findings from the Investor Perspectives Survey that might be of most concern – indeed, surprise – are those relating to ESG, and diversity and inclusion. Both subjects have become core talking points for both real estate investors and managers in recent times. But is the talk backed up with practical action to push these agendas forward within the sector? Our survey findings would indicate otherwise.
ESG and diversity and inclusion form a major part of due diligence for just 31 percent and 23 percent, respectively, of investor respondents. Fifty-four percent say they do not actively engage managers to promote diversity and inclusion, while a whopping 73 percent say it has not been a deal breaker.