Despite the record inflows into private funds, the alternative real estate asset class will face slower growth in the coming years due to inconsistent valuations and rising inflation, financial data provider Preqin found.
According to its ‘2022 Preqin Global Alternatives Report’, investors should expect a slower growth across this asset class due to a different valuation for separate real estate sectors
“We have the AUM [assets under management] grow at 12% CAGR [compound annual growth rate] at the start of this decade, and then it dropped to 8.6% in the second half and we expect a slower growth in the coming five years for a couple of reasons,” Ee Fai Kam, Preqin’s head of Asian operations, said during a virtual press briefing on Wednesday.
“The number one is that the valuation is inconsistent across the sectors as retail and hospitality have taken a huge hit from the pandemic but logistics and the bigger centres have become the new darlings and offices and residential are sectors which are holding steady,”
The second potential threat, according to Kam, was rising inflation, which may or may not be transitory.
“Transitory is a password at present for macro-economic forecasters as is the general expectation is that inflation could prove to be just transitory. If it is, and even if interest rates rise slightly, the outlook is likely to remain positive. In this environment investors flows would likely continue and valuation multiples may not expand and they may on average be maintained,” he said.
“But if inflationary environment persists, and growth is subdued as a result, this could lead to downward pressure not only on investors flows but also on valuations.”
Additionally, according to a greater proportion of investors surveyed by Preqin, the performance of real estate assets was expected to deteriorate compared to a year ago.
At the same time, the US would remain the dominant target market for real estate investors over the next 12 months across the developed economies, but investors also remained positive about China.
“Those that we spoke to continue to find China as a market of opportunity despite China falling down the ranking of being the most favoured emerging market. However, for many of many investors this emerging market might be difficult to enter,” Kam said.
Additionally, across the Asia-Pacific region, there continued to be other real estate markets, such as Australia, offering the yield differentials which could justify international investors’ interest, he said.
“Some [investors] may need to factor the hedging costs into their decision making but the desire for an international portfolio with exposure to various sectors at different point in the economic cycle can prove to be a deciding factor,” Kam said.
