Institutional investors are planning to allocate more capital to unlisted real estate this year after a strong period of performance in 2014.
Research from Preqin showed 79% of investors already active in private real estate planned to increase the amount of capital they commit to the sector compared with 2014. No investors were looking to decrease their spending in this asset class.
“With such large amounts of capital available to fund managers, competition to put this capital to work is now intense.” —Andrew Moylan, PreqinThe positive outlook reflects an increasing satisfaction with returns from private real estate. A third of investors told Preqin their allocation’s performance had exceeded their expectations—just 14% had said this in 2013, and 3% in 2012.
Turning to fund managers, Preqin reported that 83% had seen an increase in investor appetite in the past 12 months. This is despite a huge amount of dry powder yet to be invested across the funds Preqin surveyed. While assets under management in private real estate grew to a record high of $742 billion in 2014, $217 billion is still in cash.
“With such large amounts of capital available to fund managers, and more interest in real estate from a range of other players, most notably the largest sovereign wealth funds, competition to put this capital to work is now intense,” said Andrew Moylan, head of real assets at Preqin.
Three quarters of fund managers said there was more competition for core real estate assets than 12 months ago, Moylan added. He said “aggressive pricing and a competitive landscape” were challenging fund managers’ ability to source transactions.
Separate research from index provider MSCI has shown that demand for property in London—one of the most popular prime markets in the world—has driven yields down so low that many institutional investors are being priced out of the market.
The net yield of residential properties in central London has fallen to 1.8%, according to the latest figures from IPD, the property index provider now owned by MSCI. It is the first time this figure has fallen below 2%.
“If you invested in London residential at some point during the last 10 years, the chances are that you’re laughing all the way to the bank,” said Mark Weedon, head of alternatives at MSCI. “However, if you are looking to put money into the sector now, our data shows that investors seeking income will find themselves priced out by foreign investors and owner-occupiers when trying to buy existing stock in London.”
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