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Alternative Market Briefing

Real estate investors look to higher-risk strategies and emerging markets for better performance

Tuesday, March 10, 2020

Laxman Pai, Opalesque Asia:

Investors in real estate are extremely satisfied with the performance of their portfolios in 2019 by comparison with other asset classes, said a study.

According to Preqin, twenty-one percent of those surveyed said that performance exceeded their expectations in 2019, the largest proportion of any asset class, and overall 87% are satisfied with returns.

Compare this to historical sentiment, though, and it is clear that some of the shine has come off the asset class.

The proportion that felt their investments had outperformed was the smallest in recent years, while the proportion that was left dissatisfied was the largest.

The Preqin Investor Outlook Alternative Assets H1 2020 revealed that looking ahead to 2020, opinion is split on whether returns will pick up again.

Investors are certainly more optimistic than they were at the end of 2018: the proportion that thinks returns will improve jumped from just 7% to 21%, while the proportion that thinks performance will be worse fell from 33% to 25%.

But this leaves a quarter of investors believing performance will improve in 2020, a quarter feeling that it can only get worse, and half thinking that the asset class will continue as it has. Uncertainty, therefore, seems the prevailing tone.

Asset pricing is uncomfortably high

The source of any investor dissatisfaction or trepidation is easy enough to spot: there is a general sense that asset pricing is now uncomfortably high.

Asset valuations and competition for assets remain the two most cited challenges to return generation.

Moreover, for the first time, a majority (51%) of real estate investors think that assets are overvalued, compared to 42% that think the pricing is fair.

"Conversely, our study shows that the level of concern over rising interest rates, as well as market volatility, has receded in the past year," Preqin said.

It seems less likely that there will be sharp interest rate rises from central banks in the US and Europe, and with US-China trade tensions easing, investors foresee a less turbulent macroeconomic environment than they did at the end of 2018.

Investors are moving up the risk/return spectrum

In their plans for 2020, real estate investors are moving up the risk/return spectrum and paying increasing attention to emerging markets.

In both instances, it seems as though investors are looking to forestall future return compression by seeking out new markets and higher-return strategies that will meet their performance expectations.

The proportion of investors that feel core and core-plus strategies currently offer the best opportunities has fallen by seven percentage points in both instances compared to 12 months prior.

Just 30% of investors are now targeting core funds, while 20% are seeking out core-plus vehicles. By contrast, value-added and opportunistic strategies have seen an uptick in investor interest.

Value added funds offer the best prospects in 2020

Forty-three percent of surveyed investors feel that value-added funds offer the best prospects in 2020, up from 37% a year before, and interest in opportunistic funds rose from 29% to 36% in the same period.

Similarly, the proportion of investors that will only consider developed markets has fallen from 63% at the end of 2018 to 54% a year later, while the proportion that will target a mix of developed and emerging markets jumped by 15 percentage points to 25%.

It seems that Brexit has not dampened enthusiasm for real estate investing in either the UK or the rest of Europe, while the US remains the destination of choice with seven out of 10 investors targeting it in 2020.

Among investors looking at emerging markets, most are targeting investments in Asia and Central & Eastern Europe in the year ahead, although it remains to be seen whether disruption caused by the coronavirus outbreak early this year will impact investors' appetite for the region.

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