Real Estate Institutional Investor Trends for 2015 Survey

Transcription

1 Real Estate Institutional Investor Trends for 2015 Survey

2 probity n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character. On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market to aid 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.

3 Contents The Real Estate Fundraising Environment... 2 Real Estate Institutional Investor Survey... 5 Overview of Survey Findings... 5 Profile of Respondents... 6 Sectors of Interest Geographies of Interest Emerging Markets The Secondary Market Key Terms and Emerging Managers Benchmarking Investor Fears and Concerns Our View of the Future Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 1

4 The Real Estate Fundraising Environment Fundraising in 2014 set a new post-global Financial Crisis ( GFC ) record (Chart I). The number of funds having final closes during the year actually declined from 2013, as the average size of closed funds increased. North America remained the leading market targeted by investors, followed by Europe-focused funds, with interest in North America expanding from 2013 at the expense of global and Asia-focused funds (Charts II and III). Global funds most of which are focused on developed markets, with heavy allocations to North America and Europe were the third ranked sector of focus this year. Interest in Asia-focused funds declined slightly, from 16% in 2013 to 11% last year. Fundraising in 2014 set a new post-gfc record Opportunistic funds continued to be the preferred strategy for respondents, though as a percentage of the market they declined slightly in 2014 (Charts IV and V). Commitments to core and core plus strategies increased to 11% in 2014, but that number understates overall interest as most large investors that target core strategies invest directly in assets and not through fund structures. After soaring from 8% of fund commitments in 2012 to 1% in 2013, interest in debt-focused funds declined this year, falling to 13%. Chart I Global Real Estate Fundraising USD in billions Number of Final Closes Total Amount Raised Number of Final Closes Source: Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

5 Chart II 2014 Global Real Estate Fundraising by Geography (in terms of capital raised, USD) 11% 2% 1% North America Europe 16% 45% Global Asia 25% Latin America Other Emerging Markets Source: Probitas Partners; PREQIN; PERE; IREI Chart III 2013 Global Real Estate Fundraising by Geography (in terms of capital raised, USD) 16% 1% 36% North America Global Europe 23% Asia 24% Other Emerging Markets Source: Probitas Partners; PREQIN; PERE; IREI 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 3

6 Chart IV 2014 Global Real Estate Fundraising by Strategy (in terms of capital raised, USD) 11% 6% 2% Opportunistic Value-Added 13% 4% Debt Core/Core Plus 21% Distressed Other/Secondary Source: Probitas Partners; PREQIN; PERE; IREI Chart V 2013 Global Real Estate Fundraising by Strategy (in terms of capital raised, USD) % 4% 2% Opportunistic 1% Value-Added 52% Debt 18% Distressed Core/Core Plus Other/Secondary Source: Probitas Partners; PREQIN; PERE; IREI Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

7 Real Estate Institutional Investor Survey In April 2015, Probitas Partners conducted its online survey to gauge investor interest, opinions, and perspectives on investing in real estate. Responses were received from senior investment executives globally, representing such institutions as public and corporate pension plans, sovereign wealth funds, family offices, endowments and foundations, insurance companies, and consultants and advisors. Overview of Survey Findings The following summarizes the top-line findings from the survey: Interest in real estate remains strong: On top of last year s post-gfc high in fundraising for closed-end real estate funds, interest remains strong with investors continuing to commit to the sector.... investors are also concerned that we are reaching a cyclical high in the market... though investors are also concerned that we are reaching a cyclical high in the market with over 50% of respondents targeting this as a fear. Value-added and opportunistic funds remain a key target for investors: These vehicles have led fundraising for the last few years as the market stabilized and interest in pure distressed plays declined. They remain a significant component in most investors portfolios for the coming year. Investors opinions on core are split: Out of all the real estate investment strategies, more investors identified core as the total focus of their program while an even larger percentage of investors said they do not invest in core at all. Interest in debt funds seems to have peaked: Debt-oriented strategies set an all-time fundraising high in 2013, but fell in 2014 and registered low investor interest over the coming year. North America is still the principal area of geographic focus: North America remains the most developed real estate market, of dominant interest to domestic investors and of significant interest to international investors though interest in Europe significantly increased this year. Interest in emerging markets remains limited: Investors are increasingly concerned with political and short-term economic risks especially currency risk in the emerging markets and are less convinced that the inherent longer-term, high-growth story necessarily leads to strong increases in real estate value during their normal holding periods. The biggest exceptions are Pan-Asian and Chinafocused funds, though interest in China declined from last year. Investors greatest fear too much money is flooding the market: Investors biggest fear is that, even as they pour money into the sector chasing attractive opportunities, too much money is flooding in from other investors, inflating prices and increasing risks while eroding current and future returns. Though this is always a fear of investors, this year 86% of respondents targeted that concern the highest level ever in our surveys Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 5

8 Profile of Respondents The types of respondents to the survey were diversified (Chart VI) with strong representation from pension plans, consultants, and family offices. 60% of the respondents to the survey were from the United States reflecting the fact that the United States has the longest history of institutional investors committing to commercial real estate through closed-end funds (Chart VII). However, there were a significant number of responses from Asia and Europe. Chart VI Respondents Categorized by Investor Type I represent a: 8% 6% 4% 20% Public Pension/Corporate Pension/ Superannuation Plan 10% Endowment/Foundation 1% Consultant or Advisor 10% 10% 15% Family Office Bank/Insurance Company Wealth Manager Fund-of-Funds Manager Government Agency or Sovereign Wealth Fund Other Chart VII Respondents Categorized by Firm Headquarters My firm is headquartered: 6% 2% 2% 2% United States 11% Asia ex-japan 1% 60% Western Europe Middle East Japan Australia Canada Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

9 Most respondents actively invest in closed-end private funds (Chart VIII) but many either actively or opportunistically invest in a number of other structures. Pension plan respondents, who are some of the largest investors in the market, are much more likely to pursue direct investments, with 56% of them responding that they actively invest in the structure or that it was the total focus of their program. They were also much more likely to pursue separate accounts or joint ventures, with 44% of these respondents actively targeting them. Interestingly, they were much less interested in targeting co-investments, with only 22% actively targeting that structure. Chart VIII Real Estate Investment Structures I invest via: Closed-End Private Funds Club Deals Separate Accounts Joint Ventures Open-Ended Funds Co-Investments REITs Direct Investments 6 9 Total Focus of Program Actively Invest Invest Opportunistically Do Not Invest 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey

10 What drives investors to invest? Proven, durable, top quartile managers became more difficult to access after the GFC, and since funds typically only come to market every three to five years, many investors feel compelled to commit to these managers as and when they are available (Chart IX). Consultants and pension plans remain much more focused on simply pursuing the best managers in the market judged by historical performance, with 0% of each indicating that attribute as their primary focus. Chart IX Drivers of Investment Focus My real estate investment focus over the next year will be driven by (choose no more than three): My institution will simply pursue the fund managers with the best track records available in the market 5 Maintaining established relationships with fund managers returning to market this year 45 The need to diversify my real estate private equity portfolio by strategy, sector or geography 36 Strategic focus on joint ventures and direct transactions 19 Targeting funds that will provide access to co-investments 15 Developing separate account relationships 11 Investing in emerging managers 11 The need to deploy significant amounts of capital allocated to private equity real estate 9 Other The majority of respondents plan to commit $150 million or less to the sector over the next year, though there were a number of larger respondents, led by sovereign wealth funds, whose allocations were appreciably larger (Chart X). 40% of respondents target individual commitments amounts of $25 million or less to a single fund (Chart XI). However, 22% of respondents are targeting commitments of $100 million or more to individual funds. Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

11 Chart X Real Estate Allocations Over the next year, we are looking to commit across all areas of real estate (in USD): <$50 MM $50 $150 MM 11 $150 $250 MM 16 $250 $500 MM $500 MM $1 B 9 4 >$1 B Dependent on Our Client s Allocations Chart XI Average Size of Investment Over the next year, I expect my institution s average investment size in real estate investments to be (in USD): <$25 MM $25 $50 MM $50 $100 MM $100 $200 MM >$200 MM 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 9

12 0% of the respondents were either concentrating on their current general partner relationships while targeting a limited number of new fund managers or were actively looking to add new fund manager relationships (Chart XII). On the other hand, 1% of respondents were seeking to significantly decrease their number of fund manager relationships. Chart XII Private Equity Real Estate Over the next year we would expect our primary private equity real estate focus to be (choose no more than three): Evaluating re-ups with current general partner relationships with a limited look at new relationships 40 Actively pursuing relationships with new managers 30 Pursuing direct investments 23 Evaluating re-ups with current general partner relationships, looking to decrease the number of relationships significantly Evaluating re-ups with current general partner relationships Pursuing separate accounts or joint ventures with a small number of managers We currently have no room for further commitments over the next year Other Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

13 Sectors of Interest As far as real estate strategies, the picture this year is decidedly mixed. Those investors totally focused on core strategies nearly doubled from 12% last year to 22% this year (Chart XIII). However, the number of investors who do not invest at all in core also increased, going from 29% last year to 39% this year. On the other hand, the two strategies most widely targeted, at least on an opportunistic basis, continue to be opportunistic and value-added strategies. Roughly a third of respondents last year considered debt a key part of their programs, while no respondents felt that way in this year s survey There are, however, distinct differences by investor type. For pension plan respondents, 44% reported that their program was totally focused on core investing with another 44% stating that core plus strategies were a key part of their program. With endowments and foundations, on the other hand, 5% of respondents designated value-added strategies as either a key part of their program or the sole focus of their program, with 50% responding that opportunistic funds were a key part of their program. Interest in debt funds increased dramatically over the last few years through 2013, starting from a near zero interest level before the GFC. That changed over the last year. Roughly a third of respondents last year considered debt a key part of their programs, while no respondents felt that way in this year s survey, and the number of respondents who said they did not invest in debt at all increased from 1% last year to 50% this year. Though interest in pure debt funds declined noticeably, interest in distressed debt funds increased slightly, reflecting investors worry that the market is nearing the top of a cycle. Respondents interest by product type continues to be skewed towards office, retail, industrial, and multi-family (Chart XIV). Non-North American respondents are much more focused on the office sector (6%) while Asian respondents are more focused on retail (%). North Americans, with more mature and diversified portfolios, have more interest in niche real estate strategies than European or Asian respondents Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 11

14 Chart XIII Real Estate Investment Strategies As far as risk/return strategies for funds or properties, we focus on: Core Core Plus 10 Value- Added 3 Opportunistic 9 Distressed Debt Debt/ Mezzanine 8 Partnership Secondaries 10 Broadly Diversified without Distinct Sub-Allocations Total Focus of Program Key Part of Program Invest Opportunistically Do Not Invest Chart XIV Real Estate Sector Preferences For the various industry sectors or sub-sectors of real estate globally, I am most interested in (choose no more than five): Office 64 Retail 5 Industrial 52 Multi-Family 48 Hotel and Leisure 33 Warehouse/Transportation 24 Medical Buildings 14 Agricultural Land/Strategies Self-Storage Senior Housing Green Investment Strategies Student Housing Single Family 5 Raw Land 2 Only Pursue Diversified Strategies Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

15 Table I compares the top five sectors of interest in this year s survey to the responses we received in 200 just before the market crash. What is not immediately obvious from these numbers was that in 200 distressed strategies were of dominant interest and the sector was relatively unimportant. Even with that caveat, the difference in interest between retail and hotel & leisure, the most volatile sectors, is marked between the two time periods. Table I Institutional Investors Focus of Attention Among Real Estate Sectors Top Five Responses Sector % Targeting Sector % Targeting Office 2% Office 64% Multi-Family 2% Retail 5% Industrial 23% Industrial 52% Retail 14% Multi-Family 48% Hotel and Leisure 5% Hotel and Leisure 33% Source: Probitas Partners Real Estate Institutional Investor Trends Survey, 200 & Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 13

16 Within the overall debt sector, investors are much more focused on the higherreturning distressed and mezzanine strategies rather than senior debt (Chart XV) while 32% of respondents do not invest in debt at all. Chart XV Real Estate/Debt/Mezzanine Funds As far as real estate/debt/mezzanine focused funds are concerned, we are interested in (choose all that apply): Funds focused on distressed/stressed debt purchased at significant discounts 41 Funds focused on subordinated mezzanine debt 25 Funds focused on senior debt 16 Diversified funds pursuing two or more of these strategies 11 We do not invest in debt-focused funds of any sort 32 Other Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

17 As far as manager investment style preferences between allocators and operators, two thirds of respondents were focused on operators, up from 45% in last year s survey (Chart XVI). Last year s leading response of simply focusing on fund managers with the strongest historical return fell from 4% to 32% this year. Non-North American respondents were more focused on operators (6%) as the most important attribute (Chart XVII). Chart XVI Manager Investment Style As far as manager investment style, I am more focused on: 66% Operators 2% 32% I focus solely on historical track record and/or the manager s ability to execute their strategy Allocators Chart XVII Manager Investment Style Non-North American Respondents As far as manager investment style, I am more focused on: 6% Operators I focus solely on historical track record and/or the manager s ability to execute their strategy 24% 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 15

18 Geographies of Interest North America continued to dominate investor geographic preference (Chart XVIII), increasing from 59% last year to 68% this year. Pan-European funds targeting Western Europe also increased in interest from 36% last year to 43% this year. Investors are also interested in Asia-focused funds both Pan-Asian and countryfocused funds much more so than in any of the other emerging markets. There are, however, distinct differences between North American respondents and non-north American respondents (Chart XIX). Non-North Americans are more interested in international markets than North Americans, with Latin America being the major exception to that trend. Chart XVIII Geographic Focus For the major geographic sectors of real estate, I am mainly focused on (choose no more than three): North America 68 Western Europe Pan-European Funds 43 Pan-Asian Funds 30 Global Developed Markets 2 Western Europe Country-Focused Funds 23 Asia Country-Focused Funds 16 Latin America 9 Central and Eastern Europe 5 Other Emerging Markets Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

19 Chart XIX Geographic Focus For the major geographic sectors of real estate, I am mainly focused on (choose no more than three): North America continued to dominate investor geographic preference North America Pan-Asian Funds Western Europe Pan-European Funds Western Europe Country-Focused Funds Asia Country-Focused Funds Global Developed Markets 24 2 Central and Eastern Europe 5 12 Other Emerging Markets 6 5 Latin America Non-North American Respondents North American Respondents 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 1

20 Within the European market, the United Kingdom is the clear leader as far as specific geographic interest as it was last year, followed by interest in Germany, Pan-European funds, and the Nordic Region (Chart XX). Interest in Spain and France has rebounded somewhat, but this year no respondent was interested in Eastern Europe. There was a sharp decrease this year in respondents who said that they did not invest in Europe at all. Chart XX Most Attractive Markets in Europe For Europe, I find the most attractive markets to be (choose no more than three): United Kingdom Germany Nordic Region Spain France Central Europe Italy Benelux 3 5 Eastern Europe Pan-European Funds Europe via Global Funds Do Not Invest in Europe Other This year Last year and 2014 Survey Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

21 As far as Asia is concerned, there was a decided shift away from country-focused funds towards Pan-Asian and Pan-Developed Market Asia funds (Chart XXI) with interest in Pan-Developed Market Asia funds in particular soaring from 8% last year to 29% this year. there was a decided shift away from countryfocused funds towards Pan- Asian and Pan- Developed Market Asia funds For country-focused funds, interest is tightly clustered between China and the developed markets of Australia and Japan, though interest in China declined significantly from 36% last year to 26% this year and interest in Australia declined from 36% to 21%. There was a notable increase in those respondents who said that they do not invest in Asia. Among Asian investors, Australia and China were the most favored geographies, both targeted by 44% of respondents. For North American investors, Pan-Asian funds were preferred, with 56% of respondents targeting them. Chart XXI Most Attractive Asian Markets For Asia, I find the most attractive markets to be (choose no more than three): Japan China Australia India Singapore South Korea Southeast Asia Vietnam Pan-Asian Funds Pan-Developed Market Asia Asia via Global Funds Do Not Invest in Asia Other This year Last year and 2014 Survey 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 19

22 Emerging Markets As far as investors interest in the emerging markets is concerned, the most striking result is that 42% of respondents say that they are not investing in emerging markets at all (Chart XXII), though that is down sharply from its peak of 53% of respondents last year. As far as funds focused on specific countries, China and Brazil led the way though both were significantly off their highs of the last five years, and China specifically was down to 21% this year compared to 29% last year. Interest in Pan-Asian funds, on the other hand, more than doubled, from 12% last year to 28% this year. For other country-focused funds, interest was quite scattered, with no other sector attracting the interest of more than 10% of respondents. Though Russia was an option in the survey, no respondents targeted it this year compared to 9% last year, likely in reaction to ongoing political turmoil over Ukraine. Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

23 Chart XXII Most Attractive Emerging Markets For emerging markets, I am targeting (choose no more than three): Pan-Asia China Though Russia was an option in the survey, no respondents targeted it this year compared to 9% last year Brazil Pan-Latin America Mexico Indonesia Global Emerging Market Funds Eastern Europe Turkey Vietnam India 0 Pan-Africa 0 5 Russia Do Not Focus on Emerging Markets This year Last year and 2014 Survey 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 21

24 The Secondary Market The secondary market in real estate is much less established than for private equity, with 55% of respondents reporting that they are not active in secondaries in any manner (Chart XXIII). Fundraising for specialized secondary funds targeted at real estate has never exceeded $1.5 billion in any particular year and there are relatively few real estate fund-of-funds compared to the private equity market and private equity fund-of-funds have been a leading force in developing secondary activity in their home market. For those investors who are not interested in secondaries, there is no dominant reason for that lack of interest (Chart XXIV). Chart XXIII Secondary Market Investments In the private equity real estate secondary market, we (check all that apply): Have sold or are considering selling real estate positions in the secondary market for portfolio management purposes 21 Are in the process of assessing/implementing a real estate secondary investment program 12 Actively purchase real estate fund positions in the secondary market 10 Actively invest in real estate secondary funds Are interested more in recapitalization rather than secondary opportunities 5 Are not active in secondaries in any manner Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

25 Chart XXIV Reasons for Not Investing in the Real Estate Secondary Market For those who do not invest in the real estate secondary market (check all that apply): Our current portfolio allocation serves our needs 41 We may consider real estate secondary investing at a later date after our program is more fully developed 31 It is not within our investment mandate 28 We find the return profile is unattractive 1 We do not believe the market is currently developed enough to warrant a specific allocation Other Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 23

26 Key Terms and Emerging Managers Investors remain predominantly focused on the level of management fees charged by fund managers (Chart XXV), a key element of alignment of interest between investors and fund managers. Over the last year, concern about leverage used by fund managers increased significantly, with respondents increasing their focus on this term from 29% last year to 44% this year. Non-North American investors are much more interested in the level of transaction and property management fees, with 31% focusing on these terms. For the first time this year we asked whether respondents felt that strict ESG policies were an important term for them; no respondent indicated that they focused on it. Over the last year, concern about leverage used by fund managers increased significantly Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

27 Chart XXV Issues Regarding Terms or Fund Structure The terms or fund structure we most care about are (choose no more than three): The overall level of management fees 6 Carry distribution waterfalls 44 Targeted leverage levels 44 Level of general partner financial commitment to the fund Cap on fund size Transaction/property management fees 21 Structure or inclusion of a key man provision 16 Fund term 14 Distribution of carried interest between the senior investment professionals Structure or inclusion of a no-fault divorce clause Length of investment period Sharing of carry and/or investment decision making with a third-party sponsor Adherence to ILPA terms 5 Fund hurdle rates 2 Strict ESG policy 0 We do not invest in fund structures 5 Other Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 25

28 Since it is harder for a new manager to raise funds than for an established manager, some new or emerging managers will use non-market terms or pre-specified assets to attract investors. Though these tactics can be helpful on the margin, investors remain focused on a strong attributable track record and a distinct, repeatable strategy as their key concerns (Chart XXVI). Only % of respondents stated that they would not invest in new managers over the next year. Non-North American investors are more interested in pre-specified assets than North American investors, while North American respondents are more focused on strong attributable track records (Chart XXVII). Chart XXVI Key Characteristics of New Fund Managers The key characteristics required for me to consider an investment in a new manager (choose no more than three): Strong attributable track record 9 Distinct strategy Significant percentage of pre-specified assets Team stability Key man and/or team reputation 26 Established fund manager 14 Attractive (non-market) terms Independent as opposed to sponsored structure Will not be investing in any new managers over the next year Other Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

29 Chart XXVII Key Characteristics of New Fund Managers The key characteristics required for me to consider an investment in a new manager (choose no more than three): Distinct strategy 5 8 Strong attributable track record Key man and/or team reputation Significant percentage of pre-specified assets Team stability Attractive (non-market) terms Independent as opposed to sponsored structure Established fund manager Will not be investing in any new managers over the next year 4 13 Other Non-North American Respondents North American Respondents 2015 Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 2

30 Benchmarking Investors use a range of benchmarks for their portfolios (Chart XXVIII) and in many cases use multiple benchmarks. NCREIF data is used by a bare majority of respondents globally, often in combination with another benchmark. Outside of North America the PREQIN benchmark is used more, with 38% of respondents using it. Chart XXVIII Portfolio Benchmarks What benchmarks do you use for the return of your overall portfolio? (choose all that apply) NCREIF Hurdles Cambridge Associates Real Estate Benchmarks Public Market Benchmarks PREQIN Real Estate Benchmarks IPD Real Estate Benchmarks CPI Plus Spread INREV Real Estate Benchmarks Flat Absolute Rates Townsend Closed-End Fund Index Other Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

31 Investor Fears and Concerns By far the greatest fear among investors is that too much money is flooding the sector, driving down future returns while increasing risk (Chart XXIX). This response was the leading concern across all types of investors and across all geographies, and increased from 2% of respondents last year to 86% of respondents this year. This year Probitas Partners added the fear regarding reaching a cyclical market high point. This was the second leading response, with 52% or respondents selecting it. The fear that currency risk will impact values of foreign real estate holdings doubled from 14% last year to 29% this year. Table II highlights the three greatest fears from this year s survey compared to 2008 survey, which was taken in the midst of the market turmoil of September In 2008 investors were very focused on credit problems in their portfolios, problems that were developing right before their eyes, while in 2015 investors are concerned with developing problems, too much money in the market and a feeling that we are nearing the top of a cycle. The greatest fear of 2015, that too much money was flooding into the sector, was not a concern in September 2008 as fundraising was grinding to a halt. Table II What Keeps You Up at Night? Top Three Responses Issue % Issue % Credit problems in Western or mature markets will dramatically impact performance 6% Too much money is flooding into real estate, driving down returns while adding risk 86% Capitalization rates will increase significantly impacting existing portfolio valuations 30% We are nearing another cyclical market high point 52% Fund structures and underlying property management fees are destroying alignment of interest between investors and fund managers 24% Too much money is chasing too few quality managers/funds 40% Source: Probitas Partners Real Estate Institutional Investor Trends Survey, 2008 & Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 29

32 Chart XXIX Greatest Fears My three greatest fears in the real estate market at this moment are: Too much money is flooding into real estate, driving down returns while adding risk 86 We are nearing another cyclical market high point 52 Too much money is chasing too few quality managers/funds 40 Current pricing for equity is artificially high 31 Currency risk will impact valuations of my foreign real estate portfolio 29 Fund structures and underlying property management fees are diluting alignment of interest between investors and fund managers 19 I want exposure to emerging markets but there are too few quality or experienced managers in these markets 10 I am not properly staffed to pursue more active strategies such as co-investments, direct investments or joint ventures The number of funds I have in my portfolio is too large for my firm to effectively monitor Access to managers with significant operational capabilities is limited I am over-allocated to private equity real estate Increased demand is limiting my access to co-investments or separate accounts Access to top performing managers is becoming more difficult 5 5 Too much money is targeting real estate debt 2 Other Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

33 Our View of the Future Several key trends for the next year emanate from the survey and our ongoing conversations with investors: Continued central bank intervention and low interest rate policies have increased cap rate compression to the point where there is minimal reward and much greater downside risk from market forces. Future returns in the market are more geared toward fund managers who can generate return through operational returns or through targeting specific sectors or geographies with strong rental growth prospects in a market where interest rate risk is asymmetric. Fundraising for real estate vehicles is likely to grow over the next year but market events could quickly stymie that trend. Key factors driving this: Substantial realizations are being achieved, driving a need for investors to redeploy proceeds to maintain allocations in a market with limited attractive alternatives. However, there is a growing fear that we are approaching the top of a market cycle that could have a significant impact as it did in Though there is not a consensus on a potential trigger event, underlying investor fears mean a reaction could develop quite quickly. The large will become larger, faster Closed-end funds focused on value-added and opportunistic strategies continue to be the vehicle of choice for most investors without the scale to invest directly. Many institutional investors lack the internal resources to pursue more active strategies, such as joint ventures, co-investments, direct investments, and separate accounts, and will continue to access real estate through fund managers. However, these investors remain highly focused on manager quality and fund terms. Investors are also becoming more concerned on the leverage and investing strategies being used by opportunistic managers, looking to avoid the worst of the problems that arose in the last market crisis. Pension plans will continue the trend of lowering their costs and increasing investment control by pursuing direct investments, separate accounts, and joint ventures. These strategies require more resources and experienced internal staff to execute effectively and are not easy for smaller investors to copy. However, the large pension plans active in these sectors are diverting large amounts of capital away from standard closed-end funds into these strategies and will continue to do so. The large will become larger, faster diversification, consolidation, and platform investing. There is an increasing trend amongst large fund managers to become much larger still, through strategy diversification, purchasing competitors, and platform investing. This trend is rapidly breaking the industry into large asset managers at one end, providing a range of services including separate accounts, funds targeted at specific geographies and funds targeting a range of specific strategies from opportunistic through debt investing to smaller managers at the other end singularly focused on a specific strategy or geography. Some of this growth is fueled simply by new product launches, while other growth is fueled by buying competing managers. The demand for assets created by this is driving more purchases of platforms of investments as opposed to single discrete properties Probitas Partners Real Estate Institutional Investor Trends for 2015 Survey 31

34 Geographic rotation Asia as the next target. Over the last couple of years there has been growing interest in European real estate as a number of investors believed that the United States was becoming too expensive. We have recently detected increasing interest in Asia, especially in the more developed markets, in reaction to a view that so much money has come into Europe that value is becoming more difficult to find. Interestingly, there is developing interest in Asian core and core plus strategies, in open-end as well as closed-end funds. Interest in real estate debt and credit strategies seems to be diminishing. After increasing in interest from 2011 through 2013 from nearly no interest previously, fundraising for these strategies is slowing. With yields in the senior debt and mezzanine market still under pressure, investors will be more cautious in committing to these strategies. Distressed debt is rising on radar screens. While interest in straight debt and credit funds is being squeezed along with yields, interest in distressed debt is holding its ground, though it is certainly not surging. Though investors are increasingly edgy about the markets in general and concerned that we are nearing a market peak, they are uncertain whether a turn in the market will generate significant investment opportunities. Since the last potential 100-year flood of opportunities was effectively dammed by concerted central bank action, investors are concerned that central banks will intervene in a major way again and limit the opportunity though the tools that central banks may have this time around seem more limited. Investors continue to be cautious about emerging markets. A number of key emerging markets have been plagued by limited liquidity while others have suffered from recent political or economic turmoil. Though investors believe that the long-term economic growth potential for emerging markets is better than developed markets, they are less certain about the shorter-term prospects for real estate returns in specific markets, especially compared with what appears to be competitive returns for several strategies in developed markets with perceptibly less risk. Emerging managers with distinct, replicable strategies and competitive advantages continue to be of interest. Investors are increasingly looking to add alpha to their portfolios by backing new managers with distinct strategies or competitive advantages and are not as interested in pursuing just another opportunistic fund unless its track record is extremely compelling. Real Estate Institutional Investor Trends for 2015 Survey Probitas Partners

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36 Real Estate Institutional Investor Trends for 2015 Survey Probitas Funds Group, LLC Probitas Funds Group, LLC PFG-UK Ltd. Probitas Hong Kong Limited 425 California Street 1120 Avenue of the Americas 1 Berkeley Street Level 15 Nexxus Building Suite 2300 Suite 1802 London 41 Connaught Road San Francisco, CA New York, NY W1J 8DJ Central USA USA UK Hong Kong Tel: Tel: Tel: +44 (0) Tel: All rights reserved. Photocopy and reproduction permission is available from Probitas Partners by writing to John Murphy in the San Francisco office at jjm@probitaspartners.com. Any reproduction of this publication without Probitas Partners prior consent is an infringement of copyright law. Confidential 2015 Probitas Partners