Private equity real estate investment activity may slow down in the next 12 months, according to a recent report from London-based research firm Preqin. That’s largely because a significant number of the investors surveyed by Preqin—33 percent—believe the sector will perform worse in 2019 than it did in 2018, which was a record year for both the number and value of deals announced and closed at $325 billion.
Now, 66 percent of alternative asset investors believe the equity market has reached a peak and more than half of surveyed investors in real estate worry about the impact of higher interest rates (58 percent) and asset valuations (54 percent) on the returns they will be able to generate going forward. Thirty-three percent view high competition for assets as a challenge to return generation in the real estate sector, and 20 percent cite the geopolitical landscape as a risk.
In addition, 56 percent of real estate investors believe portfolio/asset pricing will increase over the next 12 months, while only 5 percent say prices will go down. Meanwhile, 22 percent say pricing will stay the same and 16 percent feel unsure about the outlook.
Absolute returns were cited as the primary reason for investing in real estate by only 19 percent of investors. Preqin found that close to three quarters of investors it surveyed target real estate allocations for portfolio diversification, 39 percent target the asset class for a reliable income stream and 34 percent are seeking an inflation hedge. In fact, 48 percent of survey respondents indicated they are targeting annualized returns of less than 10 percent for their real estate assets.
As of November, 64 percent of investors indicated that their real estate investments lived up to expectations, with 26 percent saying their expectations were exceeded and 10 percent saying their expectations were not met. This was a slight improvement from the year before, when 66 percent of investors said real estate met their expectations, 22 percent said it exceeded their expectations and 12 percent said it had fallen short of expectations.