As mentioned earlier in our “Capital Surge” post from a few days ago, the “2013 Institutional Real Estate Allocations Monitor” from Cornell University & Hodes Weill identified some interesting trends in the industry. We’d like to expand upon another noteworthy takeaway from that study today, including a bit more recent info:
“Institutions continue to shift from direct investing to outsourcing to third-party managers.”
It’s been explained that the flow of capital into real estate will be steady in the coming years. A particularly active set of investors will be small to medium-sized institutional investors (i.e., under $50 billion in global AUM). One of the likeliest vehicles for smaller players to place capital would be through private funds. In fact, 66% of investors with under $50 billion in AUM will invest via private funds.
In contrast, investors with over $50 billion in AUM (just 47% in funds) tend to prefer JVs, separate accounts, or going direct. For example, large insurance companies tend to focus on larger, lower-yielding core deals and have bigger staffs who can more readily manage their investments without 3rd parties.
Meanwhile, the private real estate funds will see a rise in interest coming from these several investors looking to increase their under-target allocations. As such, investors will soon be competing to place their capital into the best funds and, in turn, investment managers will be fielding more investor requests (e.g., Due Diligence Questionnaires).
Case in point: data-provider Preqin has some revealing stats in its Q1 2014 Quarterly Update that shows 54% of private funds that closed in Q1 2014 either met or exceeded their capital targets. Furthermore, their May Real Estate Update reveals that funds focused on Europe – one of the most attractive investment regions currently – have met or exceeded their capital raising goals in 72% of the funds that closed in Q1 2014. While this is up from 2013 and 2012 (57% and 46%, respectively), what is most remarkable is that 29% of the European focused funds exceeded their fund raising goals by more than 25%. An additional tidbit is that in the past year the average time these funds are marketing has dropped to 17 months from 19 months.
A corollary to this is that mediocre managers may take advantage of the large amount of capital eagerly seeking a home. Investors will need to maintain their rigorous investment review processes in order to place capital in those “best in class” funds. As capital surges into real estate it will likely become increasingly competitive for all. Parties who are able to use technology to be efficient and maximize their resources during this screening and selection process will have a leg up on their peers.
Check back with us soon as we delve into one of the report’s other key conclusions.
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