Optimism and Competition on the Rise in RE

The recovery in core commercial property markets has created a sense of optimism among real estate fund managers.

But the renewed positivity is a blessing and a curse for those looking to deploy capital in the sector.

As new managers pile in, they add to competition for assets and investors, driving yields down, and average fundraising times up, while pushing managers to look beyond core markets and to move up the risk spectrum.

As of June, there were 450 private real estate funds in market, aiming to raise $158B.

These include several massive funds being raised by the sector’s biggest names, including Lone Star Fund IX, a $7B debt fund, and Blackstone Real Estate Partners Asia’s opportunistic fund, which is targeting $5B.

This is on top of the estimated $206B of dry powder that managers already have to spend.

This week, I spoke to Preqin’s Head of Real Assets Products, Andrew Moylan, about the firm’s “Real Estate Fund Manager Outlook”, which looks at manager sentiment and their outlook for the coming years.

“There is more capital coming from Asia, and so on,” Preqin’s Moylan tells PrivcapRE.

“People think there are opportunities but it is becoming more competitive to make acquisitions, particularly in the bigger markets like New York and London, and for prime trophy-type assets. In some markets it’s harder to find value.”

This search for value has prompted investors to investigate secondary markets, diversified asset types and value-add or opportunistic buying opportunities, Moylan says.

Preqin’s “Real Estate Fund Manager Outlook”, based on a survey of more than 100 managers, shows 63 percent of fund managers expected to invest more in real estate assets in the coming 12 months, compared to the year prior, while 82 percent say investor appetite for the asset class has risen.

Adding to the flood of cash flowing into real estate is the wave of asset exits by fund managers. They are using buoyant market conditions to sell assets and return capital to investors, with $73B returned between January and September 2013, according to Preqin.

Another consequence of the increased competition for investor dollars is a longer fundraising period. Average time in market for closed-ended real estate funds has risen from 9.9 months in 2006, to 19.1 months in 2014 year-to-date. Moylan says the longer fundraising period could also be attributed to increased due diligence by LPs.

According to the Preqin report, investors are increasingly looking at experienced managers with a proven track record, meaning that fundraising for first-time or less-experienced managers remain challenging.