What Are Real Estate Investors Saying?

Results from a Preqin survey of 166 institutional private equity real estate investors between June and August of 2010 regarding their private equity portfolios and how they will approach the market in the next 12 months were recently released. The survey spoke to investors of varying size, type, and geographic location to get a balanced view as to the state of this industry.

Nor surprisingly, the survey results revealed that fundraising in the first two quarters of 2010 was not positive, with a 2010 Q2 fundraising total of only $7.3 billion across 20 private equity real estate funds. This was the lowest quarterly raise since Q3 2004. This figure reinforces that investors remain skittish and are simply not confident as to the direction of the industry and the timeline for recovery. I would venture to say that it is a lack of confidence and/or understanding for the direction of the overall economy that also has dollars sitting on the sidelines. People work very hard for their money and want to ensure their money will "return the favor" prior to parting with it. Of the 166 investors surveyed, 76% indicated they did not make any new fund commitments in the first half of 2010. While this is largely attributed to investors being cautious and extremely prudent in their search for new investments, the lack of cash flow is another major deterrent in making new commitments. As deal flow has come to a virtual standstill both capital calls and distributions have slowed significantly, leaving investors with large pools of unfunded commitments as well as little in the way of distributions checks, which they historically have reinvested in new funds to maintain their allocation to this sector. 

A result that I found to be very telling is that 73% of the investors surveyed were below their target allocations for real estate.  This leaves no doubt that investors are and in my opinion will remain for a long while very cautious and gun-shy as it relates to making investments in this sector. Investors were burned badly in this latest downturn, many in epic proportions and confidence has been significantly eroded.

The positive note to all of this is that investors are still maintaining their target allocations to private equity real estate and once confidence is restored, there is and will be new capital waiting to be injected back in to the market. However, only those GPs who understand what it is LPs are looking for to get them over this hump and recognize that a new playing field has emerged will succeed in attracting those dollars.

For a full detailed review of all results, please contact me.

Sagar A. Dalal is the co-founder and managing principal of Beckerman’s real estate fund advisory division. The division works with real estate fund managers by advising on all aspects of the private fund placement process including fund structuring, competitive positioning and market assessment, preparation of fund-related documentation and providing expert fund communication advisory services to fund managers to ensure a productive and successful relationship is maintained with current and prospective investors. He can be reached at [email protected].