Even though performance has mostly met or even exceeded expectations, investors are concerned by asset valuations, and are exercising caution, Preqin’s survey found with only 18% claiming returns were below expectations. The majority (56%) reported returns met expectations, while more than one-quarter (27%) said return expectations were exceeded.
However, investors’ outlook on real estate performance is the most negative across the universe of alternative asset classes which Preqin monitors. More than one in 10 (11%) believe the asset class will perform better in the next 12 months, whereas almost one-quarter (23%) feel it will perform worse, as investors brace for lower future returns.
As a result, real estate investors are expected to be more cautious in the coming 12 months from Q3 2019: 27% are planning to invest less capital compared to the previous 12 months, whereas one year ago, the proportion looking to invest less capital was smaller at 17%.
Rising competition and an abundance of dry powder has kept valuations frothy for some time now, reports Preqin, however, asset prices cannot continue to increase indefinitely.
Investors believe we are at the peak of the cycle, respondents are divided across individual asset classes. In both private equity and real estate, a majority of investors believe that assets are overvalued, and 48% of investors in these asset classes feel a market correction will occur by the end of 2020.
Asset valuations rank as the biggest challenge for return generation among real estate investors (cited by 82%), according to Preqin’s survey, which added:
“Competition for assets is a challenge for 52% of investors; with so many active firms in the market with capital to put to work, and with prices at record levels, it is harder than ever for fund managers to find assets they can add value to.
“Value-added funds remain the most sought-after strategy among real estate investors, and 46% feel they currently offer attractive investment opportunities (Fig. 25). Investor appetite for opportunistic funds is on the rise again having dropped off over the past year: 44% of investors are planning to target the strategy in the next 12 months, up from 20% in June 2018 and 29% in December 2018.
“As with previous years, the established markets of the US and Western Europe (excluding the UK) are viewed most favourably among investors: 57% and 52% believe they are presenting the best opportunities at present. Emerging Asia is the clear favourite among real estate investors targeting emerging markets in the year ahead: a third of investors named each of China and India as presenting the best opportunities, and 31% feel the rest of Emerging Asia is attractive in the present climate.”