Appetite for Risk in Private Real Estate Grows, Survey Says

(July 7, 2011) – A Preqin survey of alternative investment consultants has revealed that investors are looking to embrace riskier private real estate opportunities.

A full 72% of those surveyed intend to advise their clients to invest more or significantly more capital in private real estate than in 2010 and only 9% said they would recommend a smaller allocation. Those surveyed also indicated a greater preference for riskier opportunistic, distressed, and value added funds over less risky core and core-plus funds.

Over 70 alternative investment consultants from around the world participated in the study.

Geographical considerations colored the responses, with 68% surveyed saying that North America will present the best investment opportunities in the coming year and 50% believing that Asian private real estate will be attractive. The consultants surveyed were less bullish on the European and South American private real estate markets, with only 38% and 35% respectively saying that the regions would offer good opportunities in the next year.

Preqin asked the survey participants to rank different fund types on a scale of 1—5, with one being the least attractive and five being the most attractive. Riskier funds scored best, with opportunistic funds given a 3.7 and value added and distressed strategies both receiving a 3.6. Core and core-plus strategies got a ranking of 2.6 and 3.0 respectively.

“It is possible that consultants believe core properties have become overpriced due to demand for high quality assets following the downturn,” the survey said. The indicated preference for riskier strategies suggests that private real estate investors will become more eager to stomach risk.

Recent moves by asset owners into real estate underscore Preqin’s finding. Norway’s $584 billion sovereign wealth fund announced July 5 that it was purchasing $1 billion of Paris property from French insurer AXA. That investment followed up on the SWF’s decision in 2010 to invest $722 million for a 25% stake in the UK Crown Estate’s Regent Street properties in  London.