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Private Real Estate Investors Show Greater Risk Tolerance

03/07/2013 | By Carisa Chappell

Private Real Estate Investors Show Greater Risk Tolerance
After playing it safe for years, private equity real estate investors are showing that they are more willing to take on risk, according to a report.

Alternative asset research firm Preqin noted in a Mar. 6 report that value added funds, a category of medium-to-high-risk strategies, are the most sought-after fund type by private real estate investors this year. Prior to this year, the report noted that focusing on lower-risk strategies was the dominant preference among active investors.

Fifty-five percent of private real estate investors are targeting value added funds in 2013, according to a Preqin survey, compared to 47 percent targeting those funds in 2012.

Additionally, Preqin’s data showed that 36 value added funds held a final close in 2012, raising an aggregate of $11 billion. The 27 funds that closed in 2011 raised an aggregate total of $8 billion. The 36 funds that closed last year represents the most successful year for value added fundraising since 2008, when 90 vehicles raised an aggregate of $28 billion.

Andrew Moylan, Preqin’s manager of real estate, said value added funds’ improved performance has investors apparently feeling more comfortable with risk-taking strategies. Additionally, the market is showing signs of concern about the prices of core assets, according to Moylan.

“Investor appetite for value added private real estate funds declined following the economic downturn in 2008, while interest for lower-risk core funds saw a marked increase,” he said.

Investor appetite for core funds has declined in 2013. Forty-five percent of survey respondents said in January 2013 that they are planning to invest in core funds, down from the 54 percent who reported that they were planning to invest in core funds in 2011.  

Moylan said that the median rate of return from value-added funds in 2008 and 2009 surpassed that of all other fund types in those two years. “These figures may have helped boost investor confidence in value-added real estate and could also serve to attract more investors to this fund type in the future,” he said.

Even with the increased investor appetite for value added funds, Moylan said private equity fund managers will likely find raising capital challenging, given the number of funds seeking capital. There were 107 value-added funds in the pipeline in February 2013, compared to 95 in February 2012.