real estate market review and institutional investor...

Real Estate Market Review and Institutional Investor

Trends Survey for 2011

© 2011 Probitas Partners

Confidential & Trade Secret. © 2011 Probitas Partners. Do not circulate or publish.

Probitas Partners is a leading independent knowledge, innovation, and solutions provider to private markets clients. It has three integrated global practices that include placement of alternative investment products, portfolio management, and secondary fund advisory. These services are offered by a team of employee owners dedicated to leveraging the firm’s vast knowledge and technical resources to provide the best results for its clients.

On an ongoing basis, Probitas Partners offers research and investment tools on the alternative investment market as aids to its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s broad knowledge of the market. Probitas Partners also surveys institutional investors in order to determine more directly their perceptions of various aspects of the market, and the survey of real estate investors included here is part of that process. Unless otherwise noted, charts included in this white paper are from the Real Estate Market Review and Institutional Investor Trends Survey for 2011.

n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character.

probity ¯ ¯˘

Confidential & Trade Secret. © 2011 Probitas Partners. Do not circulate or publish. 1

C o n t e n t s

Key Real Estate Trends for 2011 ................................................ 3

Private Equity Real Estate Fundraising Landscape ............. 4

Real Estate Institutional Investor Survey ............................. 6

Profile of Respondents ........................................................... 6

Plans for Investing ................................................................. 10

Sectors and Geographies of Interest .................................. 13

The Real Estate Secondary Market ..................................... 19

Structural Issues and Emerging Managers ....................... 21

Portfolio Benchmarking ........................................................ 23

Investors’ Greatest Fears ...................................................... 24

Conclusion ..................................................................................... 27

Confidential & Trade Secret. © 2011 Probitas Partners. Do not circulate or publish.2

Page Intentionally Left Blank


Key Real Estate Trends for 2011

Probitas Partners has identified several key trends in the private equity real estate market that will impact institutional limited partners over the next year:

• Though beginning to rebound from the bottom, the portfolios of many limited partners remain troubled. Many portfolios have bounced off the rock bottom values reported in 2009, but the market is still weak, and portfolios with significant exposure to 2006, 2007 and 2008 transactions remain under water or at risk of loss.

• Fundraising rebounded very slightly in 2010, but is still 70% off 2008 levels. Global real estate fundraising increased by 10% in 2010 from the previous year, but was still significantly off the market peak year of 2008.

• Repricing of narrow bands of real estate assets. Certain property types in developed markets saw dramatically increased demand and therefore upward pricing pressure in 2011. These included, for example, trophy office assets in world capital cities, longer-term leased and stabilized industrial distribution buildings, and multifamily assets in a handful of U.S. cities. But all of these were driven by unique buyer motivations and are not indicative of a general firming of pricing for real estate assets in the developed markets.

• Most fund managers are still dealing with significant legacy portfolio problems. Most real estate fund managers continue to deal with profound portfolio problems that have not yet been forced to a head; lenders continue to avoid taking action to force defaults because regulators in turn are not forcing their hands, and they, too, hope for a macro improvement over time to fend off write-offs. But as we move through 2011, it is likely that more of these problems will come to the fore by virtue of continued weak property level performance, actual defaults as borrowers fail to pay taxes, advance capital to release vacant space, or failure to maintain the asset in ways that will force lenders to action.

• The largest investors are focusing on direct investments, joint ventures, and separate accounts. A number of the largest investors, most with significant internal resources, are rejecting most fund investments and shifting their focus to transactions or vehicles where they can exert more control and minimize third-party fees and carry.

• Interest in certain emerging markets increased noticeably during the year. Unlike the developed world real estate markets that are mired in fundamental and structural problems, real estate markets such as China and Brazil, with expanding economies and burgeoning demand, are increasingly an area of focus for institutional investors.


Private Equity Real Estate Fundraising Landscape

Fundraising for private equity real estate partnerships improved slightly in 2010 (as detailed in Chart I), but continues to be well off the peak of 2008. Fundraising for all illiquid alternative assets fell precipitously in 2009, with the drop in funds raised for private equity real estate particularly severe, ending the year down over 70%. In spite of the slight increase in capital raised for the sector in 2010, the fundraising environment as a whole remained very similar to 2009. Investors, still focused on liquidity needs and concerned about undrawn commitments to potentially wounded fund sponsors, continued to avoid closed-end funds. Most investors spent the year triaging their portfolios and saw little in the way of distributions to fund current capital calls.

Of the new commitments made in 2010, funds focused on developed markets still captured the lion’s share (as shown in Chart II) via funds targeting North America or Europe, or via large Global funds with significant allocations to these geographies. Though investor interest in Asia appears to be nearly on par with Europe, fundraising in Asia was driven primarily by two sizable fund closings: Fortress’ yen-denominated Japan Opportunity Fund, which closed on the equivalent of $830 million during 2010 and is targeting debt opportunities; and Star Capital’s Star Capital Investment Fund, a China-focused RMB vehicle which had a first close on roughly $886 million in December.

While fundraising for private equity real estate partnerships is likely to improve in 2011, for the large number of fund managers that delayed fundraising in 2009 and 2010

and plan to return to market this year, securing commitments from institutional investors will likely be a challenge. Investors remain wary of the sector, fund managers will likely still be dealing with substantial portfolio issues, and those lucky enough to have their portfolios in order are not likely to have the stellar historic returns necessary to compel investors to jump into the next fund.

As of February, Probitas Partners has tracked over 330 funds in the market seeking over $130 billion of capital. Nearly all developed market fund managers raising new funds have positioned themselves as “distressed investors” in order to capitalize on the obvious opportunities in debt restructurings, distressed sales, and operational turnarounds as few other strategies are viable today. Most of these “distressed investors,” however, will not be able to demonstrate a long-term attributable record in such strategies. In emerging markets, such as China and Brazil, the strategic focus remains on growth opportunities.

In the developed countries, it is likely that only those established fund managers with proven, compelling track records and considerable support from their existing investors will be able to secure new investments as institutional investors seek to cull under-performing managers and reduce the number of their general partner relationships. The result is a steep raising of the bar for new relationships.


Chart I Global Real Estate Fundraising 1990–2010U

SD in

bill

ions

120

100

80

60

40

20

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Probitas Partners

0.3

Capital Raised Final Closes

0.0 0.2 0.9 0.7 0.7 1.2 0.7 4.9

92.6

76.5

60.4

105.3

Chart II Private Equity Real Estate Fundraising by Geography for 2010 (In Terms of Capital Raised, USD)

Source: Probitas Partners

Global

North America

Europe

Asia

Latin America

Other Emerging Markets

2.9 6.511.7

24.3

7.96.5

24%

4%

18%

17%

35%

2%

30.2

240

Num

ber

of F

inal

Clo

ses

200

160

120

80

40

0

33.1


Real Estate Institutional Investor Survey

At the end of December 2010, Probitas Partners conducted its annual online survey to gauge investor interest, opinions, and perspectives on real estate investing. This survey identifies emerging trends and analyzes investors’ changing views over time. Responses were received from senior investment executives globally, representing such institutions as public and corporate pensions, endowments/foundations, fund-of-funds, and family offices, among others

Profile of Respondents

The profile of respondents, covered in Charts III to VII, provides an overview of this year’s survey participants and serves as a basis upon which to examine the subsequent results of the survey. This profile details the types of institutions that are represented, the geographic location in which they are headquartered, their targeted allocations to real estate for the coming year, the appetite they currently have for the sector, and finally, what they expect the average size of their real estate investments to be in 2011.

Although endowments/foundations led all institutions, making up nearly 25% of respondents, no single institution dominated the survey, with fund-of-funds managers, corporate pensions, and consultants/advisors all well represented. In spite of the geographic diversity displayed amongst respondents, the overwhelming majority was made up of U.S.-headquartered institutions. While institutions globally have significantly increased their exposure to real estate, U.S. institutions have a longer history investing in the sector and continue to be the most active in it.


Chart III Respondents Categorized by Investor Type“I represent a:”

Source: Probitas Partners’ Real Estate Institutional Investor Trends Survey for 2011

Endowment/Foundation

Fund-of-Funds Manager

Corporate Pension/ Superannuation Plan

Consultant/Advisor

State Pension

Family Office

Insurance Company

Government Agency or Sovereign Wealth Fund

Chart IV Respondents Categorized by Firm Headquarters“My firm’s headquarters are located in:”


United States

Western Europe

Asia ex-Japan

Japan

Australia

Middle East

Canada64%

6%

10%

10%

14%

12%18%

24%

6%

64%

2% 4%

4%

6%

16%

4%


As detailed in Charts V and VI, 2011 will see a shift towards larger real estate allocations, a trend that does not appear to be limited to any particular institution or geography. While a greater proportion of respondents are targeting commitments of $250 million and above, only 10% of all respondents are planning to decrease their allocation targets for the coming year. Endowment/foundation respondents continue to moderate their exposure to real estate with over 80% planning to commit no more than $50 million in 2011 and none planning to commit over $250

million. This is not entirely surprising given the widely publicized liquidity difficulties many of them experienced following the financial crisis.

Broadly speaking though, most respondents will target smaller commitments (detailed in Chart VII) with the majority targeting individual commitments of $25 million or less. For 60% of endowments/foundations, expected average investment size for 2011 is less than $10 million.

Chart V Real Estate Allocations“We are looking to commit across all areas of real estate (in USD):”

Perc

enta

ge o

f Res

pond

ents

(%)

50

45

40

35

30

25

20

15

10

5

0

<$50 MM $50 MM– $150 MM

$150 MM– $250 MM

$250 MM– $500 MM

$500 MM– $1 B

>$1 B


20102011

46

353333

11

8

3

12

2

65

6


Chart VI Appetite for Real Estate“For 2011, we are:”

Perc

enta

ge o

f Res

pond

ents

(%)

60

50

40

30

20

10

0

Increasing Our Targeted Commitment Level

Maintaining the Same Level of Commitments

Decreasing Our Targeted Commitment Level


4340

44

50

1310

Chart VII Average Size of Investment“For 2011, I expect the average size of my institution’s investments into real estate to be (in USD):”

Perc

enta

ge o

f Res

pond

ents

(%)

40

35

30

25

20

15

10

5

0

<$10 MM $10 MM– $25 MM

$25 MM– $50 MM

$50 MM– $75 MM

$75 MM– $100 MM

$100 MM– $200 MM

>$200 MM


20

34

24

8

46

4

20102011


Plans for Investing

The next series of survey questions, detailed in Charts VIII to X, address how respondents will invest in real estate in 2011. This section examines the underlying factors that ultimately drive investment decisions, the investment vehicles preferred by respondents, and interest in various real estate strategies.

In the wake of the global financial crisis, hard lessons learned have made the alternative investment landscape increasingly competitive and difficult. While specific portfolio requirements and preferred

sectors or geographies will have some weight in driving investment decisions over the coming year, as detailed in Chart VIII, investors are most focused on the pursuit of fund managers with the best track records and maintaining established relationships with incumbent fund managers. In our discussions with investors we have also found that though they are focused on current manager relationships they are also triaging these, focusing heavily on those managers who performed best over the last cycle.

Chart VIII Drivers of Investment Focus“My real estate investment focus in 2011 will be driven by (choose no more than three):”

Pursuit of the fund managers with the best track records available in the market

Maintaining established relationships with fund managers returning to market this year

The need to diversify my private equity real estate portfolio

Strategic focus on joint ventures and direct transactions

Investing in emerging markets

The need to expand outside my home markets

Targeting established vehicles for recapitalization

Targeting funds that will provide access to co-investments

Developing separate account relationships

The need to deploy significant amounts of capital allocated to private equity real estate

Other

Percentage of Respondents (%)


0 15 30 45 60

55

51

29

20

20

14

12

10

8

8

8


Real estate exposure can be gained through a variety of investment vehicles. As shown in Chart IX, closed-end private funds remain the most preferred amongst respondents, with only 2% of respondents indicating they do not invest in those structures. Though respondents pursue all of the investment structures listed in Chart IX to some extent, for large investors (respondents with planned allocations of $250 million and above for 2011) specifically,

co-investments, separate accounts, and club deals are of particular interest. These investment structures can theoretically accommodate larger commitments, provide greater strategic discretion, and reduce fees, making them extremely attractive to this group of investors. Smaller investors, on the other hand, typically lack the staff and capital resources to pursue co-investments or direct investment strategies.

Chart IX Real Estate Investment Structures“Interest in investment vehicle structures:”

Perc

enta

ge o

f Res

pond

ents

(%)

100

80

60

40

20

0

Closed-End Private Funds

Club Deals Separate Accounts

Joint Ventures Open-Ended Funds

Co-Investments Direct Investments


Invest OpportunisticallyTotal Focus of Program Actively Invest Do Not Invest

25

56

172 46

34

20

39

37

24

50

40

10

29

34

32

5

21

48

31 60

23

15

2


resurgence of core strategies by many of the larger U.S. pension funds like CalPERS, who have announced their intent to pursue such strategies via separate accounts and joint ventures. But most of the actual core investment activity in 2010 was executed via direct acquisitions of “trophy” office properties in key central business districts by sovereign wealth funds. Although 35% of respondents do not invest in core, most are smaller institutions seeking return via typical fund structures.

Despite heightened aversion to investing in real estate generally following the unprecedented losses incurred by most institutional investors during the global financial crisis, there continues to be signif icant demand for oppor tunistic strategies, as detailed in Chart X.

A majority of respondents invest in core strategies. Of those respondents whose programs are not solely focused on closed-end private funds, 74% find core strategies to be of substantial interest. There is a clear

Chart X Real Estate Investment Strategies“Interest in the following risk/return strategies for funds or properties:”

Perc

enta

ge o

f Res

pond

ents

(%)

100

80

60

40

20

0

Core Value Added Opportunistic Diversified


12

38

35

15

21

50

?29

17

17

43

23

3

8

31

58

Invest OpportunisticallyTotal Focus of Program Key Part of Program Do Not Invest


Sectors and Geographies of Interest

The following section details investors’ sector and geographic preferences for 2011. These findings are illustrated in Charts XI to XVI.

Poised on taking advantage of the opportunity to achieve the promise of sizeable returns from depressed current asset prices following the market meltdown in 2008 and 2009, respondents will focus on distressed strategies in the developed markets above all others in 2011. Endowments/foundations are keenly focused on this sector.

Also of substantial interest to respondents is the U.S. multifamily sector. This sector, with monthly mark-to-market rental income was the first to decline and the first to rebound, driven by favorable macro fundamentals such as declining home ownership, population growth of the 20 to 34 age group (the prime renting cohort), and limited construction starts over the last three years.

Chart XI Real Estate Sector Preferences“For the various sectors of real estate I am most interested in (choose no more than three):”

Distressed Strategies

Multifamily

Debt/Mezzanine

Office

Secondaries/Recaps

Retail

Diversified Strategies

Industrial

Hotel & Leisure

Raw Land

Environmentally Friendly Strategies


Source: Probitas Partners’ Private Equity Institutional Investor Trends Survey for 2011

0 25 50 75 100

Endowments/FoundationsAll Respondents

5990

3220

1820

230

1810

710

510

00

3960

3210

2520


The primary regions of focus for institutional investors continue to be developed markets, especially North America and Europe, the primary target markets for global funds as well. Most respondents, however, in this post-crisis market continue to prefer to invest first in their domestic markets, further reflecting the dominance of North American and European respondents to the survey. Though Asian and Latin American investors are under-

represented in the survey, these geographies do have supporters, especially outside North America. Although not detailed in Chart XII, 72% of North American respondents selected North America as their primary focus, continuing the trend of home bias, while those respondents planned to gain their emerging markets exposure primarily via global emerging markets vehicles.

Chart XII Geographic Focus“For the major geographic sectors I am mainly focused on (choose no more than two):”

North America

Global Developed Markets

Global Emerging Markets

Western Europe

Asia

Latin America

Other Emerging Markets

Central & Eastern Europe



0 10 20 30 40 50 60

5625

4444

2513

2350

2131

1019

20

00

Non-North American RespondentsAll Respondents


Interest in North America is spread across many different sectors, as shown in Chart XIII. When comparing the results for overall respondents to Non-North American respondents there are some distinct differences. North Americans, who should know their home market best, are primarily focused on distressed opportunities while amongst Non-North American respondents,

distressed ranked fourth, with Office, Multifamily and Retail the leading sectors. It is difficult to know from these results whether the international respondents truly felt that distressed investing was a moderately less attractive opportunity or whether if they had reservations or concerns about the execution of such a strategy.

Chart XIII North American Investment Focus“In the North American market, my primary sector focus is on (choose no more than three):”

Distressed Strategies

Multifamily

Debt/Mezzanine

Office

Diversified Strategies

Secondaries/Recaps

Retail

Hotel & Leisure

Industrial

Specific Geographic Sectors

Raw Land

Agricultural Land

Environmentally Friendly Strategies

North America via Global Funds

Do Not Invest in North America

Other



0 10 20 30 40 50 60

5324

3335

2924

2741

2718

2012

1635

1012

26

618

20

00

20

20

20

04

Non-North American RespondentsAll Respondents


For Europe, the survey focused on opportunities by geography instead of by sector, given the distinct opportunities available in each country. For respondents, the two most attractive country markets remain Germany and the UK but the plurality of respondents prefer Pan-European funds, where the geographic allocation is made over time by the fund manager.

Pan-European funds were even more favored by respondents headquartered outside of Europe.

Of little to no interest to respondents were the emerging markets of Central and Eastern Europe while Spain and Italy, as markets most impacted by the economic downturn, are also among the least favored.

Chart XIV Most Attractive Markets in Europe“I find the most attractive European markets to be (choose no more than three):”

United Kingdom

Germany

France

Nordic Region

Central Europe

Spain

Eastern Europe

Italy

Europe via Pan-European Funds

Do Not Invest in Europe

Other



0 10 20 30 40 50

24

38

40

42

16

16

2

2

0

0

0


Investors’ temperature was also taken on a geographic basis for Asia. China continues to be the primary market of focus for investors interested in Asia in 2011, as detailed in Chart XV. Although down slightly from last year, China, with its story of continued economic growth, continues to dominate while interest in Japan, on the other hand, is driven by opportunities in distress. The significant influx of capital into China, however, has led some to grow cautious of certain markets where

the rapid rate of real estate investment has greatly increased competition and could potentially set the stage for a real estate bubble.

Pan-Asian funds are also of strong interest to respondents as many lack the proper resources to thoroughly diligence and underwrite the many markets that make up Asia as a whole. They are an attractive alternative to country-focused funds and provide diversified access to the region.

Chart XV Most Attractive Asian Markets“I find the most attractive Asian markets to be (choose no more than two):”

China

Japan

Singapore

Australia

Southeast Asia

India

Korea

Vietnam

Asia via Pan-Asian Funds

Asia via Global Funds

Do Not Invest in Asia

Other



0 10 20 30 40 50

41

16

18

14

5

2

36

25

11

0

14

16


For those respondents who invest in emerging markets, interest is highly focused on Brazil and China, as detailed in Chart XVI, with significant interest in India, Pan-Latin American, and Pan-Asian funds. Interest

in other specific emerging market country funds or in Pan-African funds barely register. Additionally, 38% of respondents do not invest in emerging markets at all.

Chart XVI Most Attractive Emerging Markets“For emerging markets, I am targeting (choose no more than three):”

Brazil

China

Pan-Latin America

India

Pan-Asia

Vietnam

Eastern Europe

Turkey

Mexico

Russia

Pan-Africa

Indonesia

Do Not Focus on Emerging Markets



0 10 20 30 40 50

42

36

38

20

20

20

4

2

2

0

0

0

0


The Real Estate Secondary Market

Although the secondary market for real estate remains less developed than its private equity counterpart, year after year there continues to be an increase in the percentage of investors who are actively involved in either purchasing real estate fund positions in the secondary market or in those who are in the process of implementing a real estate secondary program. Additionally, there has been a decline in those respondents who are not active in real estate secondaries in any manner.

Given that many fund managers are encountering significant problems with their portfolios, this year, for the first time, the survey asked whether investors were more interested in recapitalization opportunities (where a fund manager would be restructured in some manner in return for an injection of capital) rather than secondaries. 16% of respondents stated that they were indeed interested in this strategy and given that the recapitalization process can be complicated and difficult to execute, this is a significant response.

Chart XVII Secondary Market Investments“In the real estate secondary market we (check all that apply):”

Actively invest in real estate secondary funds

Actively purchase real estate fund positions in the secondary market

Are interested more in recapitalization rather than secondary opportunities

Are in the process of assessing/implementing a real estate secondary program

Have sold or are considering selling real estate positions in the secondary market

for portfolio management purposes

Are not active in secondaries in any manner



0 10 20 30 40 50

39

27

27

10

16

14


In spite of the fact that there continues to be a sizeable percentage of respondents who are not active in the real estate secondary market, Chart XVIII highlights the fact that

a number of these investors actually intend to develop real estate secondary programs in the future.

Chart XVIII Reasons for Not Investing in the Real Estate Secondary Market“I have no interest in investing in the real estate secondary market because (choose all that apply):”

We may consider real estate secondary investing at a later date after our program is more fully developed

Our current portfolio allocation serves our needs

We find the return profile is unattractive

We do not believe the market is currently developed enough to

warrant a specific allocation

It is not within our investment mandate

Other



0 10 20 30 40

19

8

19

15

31

35


Structural Issues and Emerging Managers

Fund terms are playing an increasingly important role in the due diligence and fund manager selection process. Increasingly, investors are able to target and influence those fund terms that are most important to them. Chart XIX details the areas investors are most focused on regarding fund terms and structure for the coming year. Although the focus on fund terms is generally similar across investor

types and geographies, there are a few notable differences, especially between endowments/foundations and others. The differences are most striking on the two leading alignment of interest concerns that most investors have, the capital commitment of the general partner to a fund and the level of management fees. These issues only ranked fifth and sixth with endowments/foundations, who were much more concerned with carry distributions and key man provisions.

Chart XIX Issues Regarding Terms or Fund Structure“The issues I focus on most as far as terms or structure of a fund are (choose no more than three):”

Level of general partner financial commitment to the fund

The overall level of management fees

Carry distribution waterfalls

Targeted leverage levels

Structure or inclusion of a key man provision

Structure or inclusion of a no-fault divorce clause

Fund hurdle rates

Cap on fund size

Distribution of carried interest between the senior investment professionals

Length of investment period

Adherence to ILPA terms

Sharing of carry and/or investment decision making with a third party sponsor

Other



0 10 20 30 40 50 60

Endowments/FoundationsAll Respondents

825

817

100

3742

4525

5125

2917

2942

3733

128

1433

2517

817


Fund managers looking to raise money from new investors will have a difficult task in 2011, and as detailed in Chart XX, a strong track record and a strong market reputation are key. In addition, investors are looking to add alpha to their portfolios and not back

“just another opportunistic fund.” Managers with niche or differentiated strategies who are better able to separate themselves from the rest of the pack will be more successful in securing commitments.

Chart XX Key Characteristics of New Fund Managers“The key characteristics required for me to consider an investment in a “new” manager are (choose no more than three):”

Track Record

Key Man and/or Team Reputation

Niche Strategy

Demonstrated Stability

Terms of Fund

Independent vs. Sponsored Structure

Established Fund

Significant Percentage of Pre-Specified Assets

No Investments in New Managers Planned for 2011

Other



0 10 20 30 40 50 60 70 80

68

30

40

26

14

54

20

2

4

10


Portfolio Benchmarking

While not immediately evident from Chart XXI, when evaluating portfolio performance, many investors use a combination of benchmarks. The most widely used amongst survey respondents are the NCREIF indices; though not

detailed in the chart, amongst Non-North American respondents flat absolute rates and public market benchmarks are the most widely utilized. In recent years, as real estate investments have been increasingly pursued as inf lation-hedging strategies, some investors have looked to “CPI plus spread” benchmarks to evaluate performance.

Chart XXI Portfolio Benchmarks“What benchmarks do you use for the return of your overall portfolio? (Choose all that apply):”

Perc

enta

ge o

f Res

pond

ents

(%)

60

50

40

30

20

10

0

NCREIF Public Market Benchmarks

CPI Plus Spread

Townsend Closed-End Fund Index

Flat Absolute Rates

Preqin Real Estate

Benchmarks

Other


50

27

17 17

13

8

19


Investors’ Greatest Fears

As the market struggles towards recovery, investors are becoming increasingly prudent about how to deploy capital. Their greatest fear in the current market is that pricing is too high and still does not reflect the slow growth in demand that they are seeing in their targeted real estate markets. Besides the frequent complaint that there is simply too much money in the market, they are also concerned that the overall quality of fund managers is low, not giving them much quality to choose from.

On the other hand, there is an undertone that the horrible credit problems in Western developed markets are getting better. Though credit problems ranked fourth in this year’s survey with 29% of investors concerned about them, last year they were the number one concern, selected by 51% of respondents.

Respondents were also encouraged to submit their own responses separate from the pre-set menu. This year the most interesting responses were as follows:

• Expectationsofrisinginterestrates.

• Hownewlyintroducedregulationswillimpactthefutureofrealestateinvesting,specificallytheAIFMdirective.

• Onaverage,qualityoffundmanagersispoor.


Chart XXII Greatest Fears “My greatest fears regarding the real estate market at the moment are (choose all that apply):”

Current pricing is artificially high and not reflective of slow growth in demand

Too much money is flooding the market and driving down returns while adding risk

Too much money is chasing too few quality managers/funds

Credit problems in Western or mature markets will dramatically impact performance

Fund structures and underlying property management fees are destroying alignment of interests between investors and fund managers

I am not properly staffed to pursue more active strategies such as co-investments or joint ventures

I want exposure to emerging markets but there are too few quality or experienced managers in these markets

Without the ability to generate carry to retain talented junior staff, fund managers will be faced with unwanted turnover

Access to managers with operational capabilities is limited

Pricing of transactions executed at the top of market was so high that my portfolio is significantly under water

Access to top performing managers is becoming more difficult

Currency risk will impact valuations of my foreign real estate portfolio

The number of funds I have in my portfolio is too large for my firm to effectively monitor

Widespread distress in private equity real estate will cause a number of fund managers to close

I am over-allocated to private equity real estate (predominantly due to the “denominator effect”)

My real estate allocation is too small to have a significant impact on overall performance

Increased fund sizes are limiting my access to co-investments

Other



0 5 10 15 20 25 30 35 40 45 50

46

40

40

15

6

4

8

13

13

17

19

29

2

2

2

2

6

6


Page Intentionally Left Blank


C o n c l u s i o n

The tenor of this year’s survey is somewhat improved from last year’s, though it is certainly not rabidly optimistic. Key conclusions:

• Most investors are still focused on distressed opportunities, though the multifamily sector is attracting significant interest as well. Most investors were heavily focused on distressed investing opportunities as they were going into 2010, but the multifamily sector, the first to decline even before the full-blown financial crisis developed, is also attracting interest now as it rebounds.

• As many investor portfolios continue to be stressed, worries persist that pricing in the market is not reflecting the true levels of weak demand. Investors feel that the market is not properly pricing risk and that there are too few quality managers in the market to choose from.

• Large investors are beginning to focus more heavily on direct investments, joint ventures, and separate accounts, especially in pursuit of core assets. After being badly burned in the current market cycle, a number of large investors that have the necessary internal resources are shifting their focus to transactions or vehicles where they can exert more control and minimize fees. During this past cycle, many investors felt that too often fund managers took actions inimical to their interests but were protected from the consequences of rash actions by a steady stream of management fee income.

• Closed-end funds, focused on opportunistic and value added strategies, are still the vehicle of choice for smaller investors. These investors do not have the internal resources to pursue more active strategies and are content to back traditional external fund managers, though they are intently focused on manager quality and fund terms.

• China and Brazil lead an increasing level of interest in emerging markets. Though India, Pan-Asian, and Pan-Latin American funds played a role, interest in growing emerging market real estate investments was driven by China and Brazil.


N o t e s :

Probitas Funds Group, LLC Probitas Funds Group, LLC PFG-UK Ltd. Probitas Hong Kong Limited

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