September 29, 2011 / 1:25 AM / 6 years ago

Property investors shun first-time funds: report

3 Min Read

NEW YORK (Reuters) - Real estate investors are likely to stick with private equity managers with proven track records, leaving first-time funds in an uphill battle to raise funds, according to alternative asset research firm Preqin.

About 48 percent of investors worldwide said they would not invest with first-time managers, up from just over a third 12 months ago, reflecting growing caution among investors, according to the report released on Wednesday.

Only 26 percent said they would invest in first-time funds, down 8 percentage points from last year. About 15 percent said they would consider doing so, down 1 percentage point, according to the study.

"For everyone it's harder now than it was six months ago," said Alan Pardee, managing partner with Mercury Capital Advisors, which helped Vornado Realty Trust's real estate investment fund, Vornado Capital Partners, raise $800 million.

"A first-time fund is harder to raise and in a hard market it's harder," Pardee told Reuters.

The study was conducted as part of the research for the upcoming 2011 Preqin Private Real Estate Investor Review, in which more than 1,500 private real estate investors were contacted.

Investors preferred more established fund managers with funds focused on specific sectors or locations where the team has a proven track record in the market.

In the first half of this year, 54 private equity real estate funds closed, raising a total of $21.7 billion. Funds that closed between January and September spent an average of 16.1 months in the market, slightly less than the average of 16.9 months funds closed in 2010 spent raising capital.

As of this month, there were 442 private real estate funds on the road targeting an aggregate $151.5 billion, up from 400 funds seeking $129 billion last year, Preqin said.

Thirty-five percent of the respondents expect to make fund commitments in the next 12 months. But 49 percent said they were unlikely to invest, according to the report.

That study also showed that the deeper the institution's pockets, the more likely they would be willing to invest. About 43 percent of the institutions with more than $10 billion of assets under management expected to invest in the next 12 months.

The majority of investors said they were seeking to maintain their target allocations to private real estate over the longer term. About 69 percent said they are currently below their target allocations, suggesting fund-raising is likely to pick up in the coming years, Preqin said.

Investors are seeking less risky real estate investments, as 82 percent said they would in invest in real estate with high, steady occupancy, a type of investment known as "core real estate."

Higher-risk, value-added funds have seen their popularity decline to 58 percent from 65 percent last year. Funds focused on the riskiest "opportunistic" investment fell to 54 percent from 66 percent last year, Preqin added.

Reporting by Ilaina Jonas; editing by Andre Grenon

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