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6 © 2016 Preqin Ltd. / www.preqin.com
Lead Article Investment Consultants’ Views on Real Estate in 2016
Real Estate Spotlight / March 2016
Investment consultants are vital gatekeepers of investor capital, with 60% of institutional investors using an investment consultant to advise on, or to actively manage, their exposure to real estate. In Q4 2015, Preqin conducted interviews with more than 40 consultants to discover their views on the market and their outlook for 2016. Overall, investment consultants are largely satisfi ed with the returns their clients have received from their alternative assets investments in the past year. More consultants felt real estate returns had exceeded expectations than any other alternative asset class, although the proportion stating returns had not met expectations was higher than for private equity and private debt (Fig. 1).
Recommended Allocations
Just 3% of consultants do not recommend a property allocation for their clients, with the majority (57%) of respondents recommending that investors place between 6% and 10% of their total assets in real estate (Fig. 2). The 86% of consultants that recommend at least a 6% allocation to real estate is far higher than any other alternative asset class, although almost one-quarter of consultants advise a hedge fund allocation of more than 15%. Only 9% recommend a real estate allocation on this level. One-third of respondents recommend clients increase their real estate allocation in 2016, while only 8% advise a lower level of real estate exposure (Fig. 3).
Strategy Allocation
As shown in Fig. 4, higher risk/return profi le strategies will be increasingly recommended by investment consultants in 2016, directing more capital towards value added (25% of respondents) and opportunistic strategies (20%). Twenty percent are also advising an increase in allocations to real estate debt strategies in 2016. Concerns over pricing for prime assets may be affecting some consultants’ appetite for core real estate, with 14% advising their clients to invest less capital in core real estate strategies in 2016 than they did in 2015. Perhaps unsurprisingly, given their
own expertise in fund selection, real estate funds of funds remain the least recommended strategy among investment consultants: 55% did not recommend the strategy in 2015 and will do the same in 2016.
Regional Allocations
As shown in Fig. 5, the majority of surveyed investment consultants will continue to advise their clients to invest in the more developed and liquid real estate markets of North America and Europe, with no consultants recommending a reduction in capital to vehicles focused on those areas. Fundraising has been strong for Europe-focused funds in 2014-2015 and consultants continue to see attractive opportunities in the region. The majority of investment consultants will not recommend investment in Latin America-, Africa- and Middle East-focused real estate in 2016.
Investment Consultants’ Views on Real Estate in 2016
33%
58%
8%
Increase Allocationto Real Estate
Keep Allocation toReal Estate theSame
Reduce Allocationto Real Estate
Fig. 3: Investment Consultants’ Recommendations for 2016 Compared with 2015
Source: Preqin Investment Consultant Survey, November 2015
3%
19% 24%14% 12%
52%
11%
36% 27%57% 61%
40%
57%
25%24%
23% 21%
8%
20% 8%
3% 6%6%
15%
3%11% 9%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Re
al E
sta
te
Priva
te E
qu
ity
He
dg
e F
un
ds
Infr
ast
ruc
ture
Priva
te D
eb
t
Na
tura
l Re
sou
rce
s
More than 20%
16-20%
11-15%
6-10%
1-5%
0%
Fig. 2: Investment Consultants’ Recommended Allocations to Alternative Asset Classes
Source: Preqin Investment Consultant Survey, November 2015
Pro
po
rtio
n o
f R
esp
on
de
nts
19%8%
73%
29%
9%
52%
58% 75%
21%
65%
78%
43%
22% 17%6% 6%
13%4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Re
al E
sta
te
Priva
teEq
uity
He
dg
eFu
nd
s
Infr
ast
ruc
ture
Priva
te D
eb
t
Na
tura
lR
eso
urc
es
ExceededExpectations
MetExpectations
Fallen Short ofExpectations
Fig. 1: Investment Consultants’ Views on the Performance of Alternative Assets in 2015
Source: Preqin Investment Consultant Survey, November 2015
Pro
po
rtio
n o
f R
esp
on
de
nts
In an exclusive excerpt from the 2016 Preqin Global Real Estate Report, we present the results of our investment consultant survey, which looks at their views and recommendations for 2016.
View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/RE/Preqin-Real-Estate-Spotlight-March-2016.pdf
35%
45%
55%
60%
60%
60%
80%
90%
45%
45%
40%
35%
40%
40%
15%
10%
20%
10%
5%
5%
5%
0% 25% 50% 75% 100%
Firm Success Raising Capital withPrevious Funds
Returning Investor Base
Sizeable GP Commitment to Fund
Firm Presence in Markets They AreLooking to Invest in
Attractive Fund Terms/Fees
Successful Performance TrackRecord at Firm Level
Successful Performance TrackRecord at Team Level
Experience/Expertise with FundStrategy
Very Important Somewhat Important Not Important
Fig. 7: Investment Consultants’ Perception of the Most Important Factors When Selecting Real Estate Managers
Source: Preqin Investment Consultant Survey, November 2015
Proportion of Respondents
Routes to Market
Interestingly, investment consultants appear to be recommending a return to the commingled fund model in 2016 (Fig. 6): 40% of surveyed consultants will advise their clients to invest more capital through pooled funds. Refl ecting the higher barriers to entry for investors, half of respondents will not be advising clients to invest in separate accounts and direct investments over 2016. However, of those consultants that will recommend these structures, none will recommend less investment in separate accounts and only 5% will advise less direct investment. More liquid structures such as REITs look to be out of favour among consultants: 20% of respondents suggested they will recommend clients invest less in this structure over the next year.
Fund Selection
When conducting due diligence on fund managers, consultants look most closely at the fi rm’s experience and expertise with the relevant strategy, and the track record of the team managing the fund, with 90% and 80% of respondents respectively stating these factors to be the most important (Fig. 7). Having a successful track record at fi rm level, a competitive fee structure and people on the ground in markets they will invest in were also key considerations, with 60% each stating these factors as very important.
Key Issues
Macro issues are an important consideration for consultants, with 72% considering the economic environment and potential impact on real estate markets as a key issue, while 67% stated the current availability of attractive investment opportunities was a concern (Fig. 8). Interestingly, while institutional investors are largely satisfi ed with the fees they are paying fund managers (see page 77 of the 2016 Preqin Global Real Estate Report), 45% of consultants consider fees as an important issue.
Regulation was not considered an important issue by many consultants (23%). When asked specifi cally about the impact of regulation on their business, views were mixed: 38% felt it had been negative, 30% felt it had had no impact and 32% said it had positively impacted them.
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7 © 2016 Preqin Ltd. / www.preqin.com
Lead Article Investment Consultant Outlook for 2016
Real Estate Spotlight / March 2016
5%
5%
5%
5%
5%
10%
15%
19%
19%
20%
20%
25%
30%
35%
30%
67%
62%
45%
45%
55%
5%
5%
14%
10%
10%
55%
45%
50%
14%
5%
35%
25%
5%
0% 20% 40% 60% 80% 100%
Fund of Funds
Distressed
Secondaries
Core-Plus
Core
Debt
Opportunistic
Value Added
Did Not Recommend in 2015, but WILL Recommend in 2016
Invest More Capital than in 2015
Invest the Same Amount of Capital as in 2015
Invest Less Capital than in 2015
Did Not Recommend in 2015, and WILL NOT Recommend in 2016
Fig. 4: Breakdown of Investment Consultants’ Recommendations for 2016 by Strategy
Source: Preqin Investment Consultant Survey, November 2015
5%
5%
5%
5%
5%
10%
10%
10%
32%
19%
29%
24%
33%
50%
48%
81%
5%
62%
62%
52%
30%
4%
0% 20% 40% 60% 80% 100%
Middle East
Africa
Latin America
Asia
Europe
North America
Did Not Recommend in 2015, but WILL Recommend in 2016
Invest More Capital than in 2015
Invest the Same Amount of Capital as in 2015
Invest Less Capital than in 2015
Did Not Recommend in 2015, and WILL NOT Recommend in 2016
Fig. 5: Breakdown of Investment Consultants’ Recommendations for 2016 by Region
Source: Preqin Investment Consultant Survey, November 2015
5% 10%
5%
10%
10%
40%
15%
45%
35%
40%
50%
20%
5%
70%
30%
50%
50%
10%
0% 20% 40% 60% 80% 100%
Joint Venture
REIT
Direct Investment
Separate Account
Commingled Fund
Did Not Recommend in 2015, but WILL Recommend in 2016
Invest More Capital than in 2015
Invest the Same Amount of Capital as in 2015
Invest Less Capital than in 2015
Did Not Recommend in 2015, and WILL NOT Recommend in 2016
Fig. 6: Breakdown of Investment Consultants’ Recommendations for 2016 by Structure
Source: Preqin Investment Consultant Survey, November 2015
Proportion of Respondents
Proportion of Respondents
Proportion of Respondents
View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/RE/Preqin-Real-Estate-Spotlight-March-2016.pdf
14%
19%
23%
23%
26%
44%
45%
60%
67%
72%
0% 20% 40% 60% 80%
Consolidation
Volatility
Regulation
Transparency
Liquidity
Exit Opportunities
Fees
Performance
Investment Opportunities
Economic Environment
Fig. 8: Investment Consultants’ Perception of the Most Important Issues in the Real Estate Market
Source: Preqin Investment Consultant Survey, November 2015
Proportion of Respondents
3%
6%
9%
20%
29%
29%
31%
37%
49%
66%
0% 20% 40% 60% 80%
Other
Retaining Clients
Increased Demand from Investors forSophisticated Products
Increased Liquidity Demand
Client Pressure on Fees
Competition with Other Consultants
Adapting to Regulatory Changes
Attracting New Clients
Meeting Client PerformanceExpectations
Identifying Attractive InvestmentOpportunities
Fig. 9: Investment Consultants’ Views on the Biggest Challenges Affecting Their Business in Relation to Their Activity in Alternative Assets
Source: Preqin Investment Consultant Survey, November 2015
Proportion of Respondents
Key Facts
57%Proportion of investment consultants advising a real estate allocation of 6-10% of total assets.
32%Proportion of investment consultants advising clients to invest more capital in Europe over
2016 than in 2015.
Number of investment consultants advising on real estate that are profiled on Preqin’s Real
Estate Online.
310
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8 © 2016 Preqin Ltd. / www.preqin.com
Lead Article Investment Consultant Outlook for 2016
Real Estate Spotlight / March 2016
The factors that investment consultants view as the biggest challenges for their business in 2016 highlight the concerns regarding the pricing of real estate assets and the impact this has on their ability to source attractive opportunities for their clients (Fig. 9.9). Additionally, meeting client performance expectations and attracting new clients are signifi cant challenges for many consultants.
Outlook
Overall, investment consultants’ outlook for real estate in 2016 remains positive, with the majority of consultants advising clients to maintain or increase their allocation to the asset class over the coming year. Higher risk/return profi le strategies in the more developed and liquid markets continue to feature heavily in the investment advice provided by consultants, with many looking at the commingled fund model as the optimal route to market.
2016 Preqin Global Real Estate Report
This article is an extract from the 2016 Preqin Global Real Estate Report, the most comprehensive review of the industry available today.
Assembled by our dedicated teams of multilingual analysts based around the world, this report enables professionals to understand the latest trends, access valuable historical data and discover the most important players in every area of the industry.
Topics covered include:
• Fundraising• Institutional investors• Fund managers• Performance• Industry AUM and dry
powder• Commentary from key
industry fi gures• Placement agents• Investment consultants• Regional breakdowns
For more information about the report, to view sample pages or to purchase a copy, please visit:
www.preqin.com/grer
alternative assets. intelligent data.
ISBN: 978-1-907012-89-1$175 / £105 / €150www.preqin.com
2016 Preqin Global Real Estate
Report
View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/RE/Preqin-Real-Estate-Spotlight-March-2016.pdf
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