Nearly three-fourths of investors believe commercial real estate assets are overvalued, which could mean storm clouds are on the horizon for the sector next year as a recession looms.
Preqin’s 2022 November investor survey reveals that 74% of investors believe real estate assets are overvalued, with fund managers saying they expect valuations to fall. Globally, 249 funds had closed as of the end of the third quarter, 46% of the full-year total in 2021, with aggregate capital totaling $101.9 billion (48% of 2021’s $210.7 billion total).
Value-added funds accounted for almost 40% of funds closed by end of the third quarter, an increase over the long-term average of 32%. Valued-added funds accounts for 35% of aggregate capital raised, or $35.6 billion, “far above” the 2001 to 2021 average of 27%, Preqin analysts say.
“Value-added funds are well placed to capitalize on repositioning older office stock, for example, toward modern ways of working” Preqin analysts note in a summary of the 2022 global report. “The strategy offers the ability to commit capital to significantly improve the quality and rental prospects of an asset. Providing the opportunity to generate returns in the double digits, this strategy is favored by many fund managers and investors because of the breadth of opportunities to put capital to work.”
Ultimately, however, “strong headwinds” persist as interest rates likely will continue to tick upwards globally into 2023 and asset values fall.
“The real estate market appears to be in the preliminary phase of a readjustment,” says Dave Lowery, SVP, Head of Research Insights at Preqin. “After benefiting from low rates for an extended period, the market is adjusting to higher rates – a trend witnessed in many parts of the world. This will mean falling prices for even the best quality assets, and if we see recessions in some markets, occupier demand may also weaken, with implications for rents. Investors may well sit on their hands and wait for the market to settle before making any new allocations, while fund managers will need to find agreement on pricing for deal activity to increase.”