Real Estate Fund Manager Concerns Grow

Real estate fund managers’ concerns are intensifying, with rising interest rates further complicating the operation of a real estate portfolio, said Preqin, New York.

“For firms raising capital, the market is very competitive, and it is obvious from the discrepancy between the numbers of funds closing and those being marketed that not all will achieve their goals,” Preqin said in its Real Estate Fund Manager special report. “We are already seeing firms adapting their offerings in response to market conditions, either by taking on more risk, by expanding their strategy or–for 61 percent of firms surveyed that are bringing a fund to market–by reducing the targeted returns of these vehicles.”

But investor appetite remains strong, largely because funds have generally delivered for investors in recent years. Fund managers have distributed capital back to investors at an “unprecedented” rate, the report noted: since 2013–the first year in which capital distributed exceeded capital called–private real estate funds have returned nearly $900 billion to investors.

“In a low interest rate environment, real estate continues to satisfy the desire for diversification, reliable income streams and attractive absolute returns,” the report said.

Preqin said the entire real estate fund landscape is beginning to change. “Firstly, fundraising–while strong–is centered around commitments to some of the largest fund managers in the space, which has made fundraising intensely competitive for the remainder. Secondly, capital available to fund managers is close to record levels, which has helped fuel the rising valuations of assets and the growth in the unrealized value of portfolio assets.”

Finally, real estate funds’ success–and the corresponding investor appetite–has brought more managers to the sector than ever before, “which is increasing the level of competition for available assets and affecting valuations,” the report said.

But if fund managers can communicate their value and ease investors’ pricing concerns, they will likely see continued capital commitments, the report said.