Smaller Private Real Estate Funds Outperform Larger Peers

Despite a greater concentration of capital being raised among larger private real estate funds in recent years, smaller funds have often outperformed larger funds, according to a report by research firm Preqin.

Global private real estate funds with less than US$500 million that began investing between 2005 and 2011 have posted median returns of 5.9%, compared with 2.3% for funds with over US$1 billion in assets.

Moreover, new fund managers on average have outperformed their more experienced counterparts. First- and second-time fund managers have posted a median net internal rate of return (IRR) of 5.8% for funds raised between 2005 to 2011, compared with 4.9% for managers that manage between three and seven funds.

"There are likely to be many reasons for this, with smaller managers potentially more nimble when making investments and newer firms more motivated to prove their worth," says Andrew Moylan, head of real assets products at Preqin.

Fundraising in recent years has concentrated more on larger size funds. Private real estate funds of US$1 billion or more in size raised 56% of the total capital raised in 2013, compared with taking a 29% share of capital the year before.

There are no separate data available for Asian or Chinese real estate funds.