Negative sentiment on private equity and real estate among institutional investors has reached a turning point. A growing number of pension funds and other investors expect an improvement in returns in the coming year, according to the half-yearly Investor Outlook from data provider Preqin.
The firm surveyed 185 institutional investors on their expectations of alternative investments for the year ahead.
Private equity and unlisted real estate in particular have had two difficult years due to rising interest rates. In both 2023 and 2024, a vast majority of respondents reported negative returns on real estate over the preceding 12 months.
Historic entry point
But a growing number of investors have the impression that the bottom has now been reached.
A majority expect returns to improve in the coming year. Over 20% of investors now even consider real estate undervalued (see graph below), compared to just 10% a year earlier. However, sentiment still remains mixed as some 40% of investors continue to believe real estate is too expensive.
Yet, there is currently a “historic entry point” in European real estate in particular, according to Sebastiano Ferrante, head of Europe at real estate investor PGIM Real Estate.
Indeed, he sees that European investors are hardly willing to invest extra money in real estate, partly because they have to invest heavily in making their existing properties more sustainable.
“The lack of capital from European investors means that high-quality core and core plus assets are coming to market at heavily discounted prices because the traditional acquirers of these assets are sitting on the sidelines,” Ferrante said, adding this dynamic is at its strongest in Germany.
In addition, Europe is set to “benefit from a forecasted fall in interest rates with the ECB [European Central Bank] predicted to cut interest rates later this year,” Ferrante noted, adding: “Cuts to base rates should mean economic growth, leading to rental growth, increases in values and improvements in returns.”
The sun is also starting to shine again for private equity, according to the Preqin survey. More than four in 10 investors expect returns to improve this year, although almost half still describe the asset class as too expensive.
It is also notable that investors are focusing on the US even more than they usually do. Most respondents see the best investment opportunities here. Among emerging markets, India is becoming increasingly popular, while China has fallen out of favour.
Infrastructure
Investors in infrastructure are also increasingly positive as interest rates finally start falling. Infrastructure suffers more from high interest rates than other categories because infrastructure investments use relatively more borrowed money, according to Preqin.
Almost three in 10 investors expect falling interest rates to lead to higher returns, with only 3% expecting lower returns.
It is also worth noting that direct infrastructure investments have fallen out of favour. An example of such a direct investment is the investment Dutch civil service scheme ABP made in a wind farm in the North Sea earlier this year.
Only 14% of investors now consider investing directly in infrastructure, compared to more than a third two years ago when ABP announced its intention to invest in the wind farm in question.
Instead, many institutional investors now choose to invest in a fund or mandate. According to Preqin, “this may reflect concern from investors about having sufficient in-house expertise to accurately value and structure infrastructure deals in a higher rate environment”.
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