There’s never been more private equity cash chasing real estate assets. And yet more funds than ever continue to come to the market. That could make 2020 the frothiest year yet for private equity investors in the CRE space.
In 2019, fund managers raised $151 billion, a volume that edged past the previous record of $148 billion achieved in 2018, according to Preqin. Average fund sizes are larger than ever as well with 295 funds accounting for that capital vs. 486 funds that had raised the $148 billion figure in the prior year.
That activity speaks to the still strong demand to invest in real estate with many investors that are maintaining, if not increasing allocations. These days, institutions are pushing 15 percent to 20 percent allocations to alternative investments, the largest beneficiaries of which are real estate and private equity, notes Byron Carlock, national partner, real estate practice leader at PwC.
“The appetite appears to still be significant for real estate product, especially for those global investors that are still sitting on cash that might otherwise be in negative interest rate bearing accounts,” adds Carlock. Yield is not easily coming from the bond business right now, and some investors are wary of volatility and high values in the equities market “So, the relative yield from the alternative asset class is really the winner in fundraising and allocations, and I don’t think those allocations are going down anytime soon,” he says.
There are a few different reasons that are supporting continued inflows into private equity real estate funds. Chief among them are good values, steady income and attractive returns relative to other fixed-income assets, as well as a desire to improve portfolio diversification and create added resiliency to downside risk. In addition, even though it is later into the real estate cycle, real estate fundamentals are still relatively solid and there are no significant oversupply concerns, notes Bernie McNamara, Global Head of Investor Services and Solutions for CBRE Global Investors. “Our view is that capital raise figures will continue to be healthy in 2020,” he says.
Fund managers compete for capital
There are a record high number of funds in the market at the start of 2020. Specifically, there are 918 global real estate funds that are seeking to raise an aggregate of $281 billion. That is a big jump compared to January 2019 when there were 676 funds in the market targeting $252 billion, according to Preqin.
However, fund managers are likely to find varying degrees of success in a market that is rewarding big name firms and established managers. Fundraising remains concentrated among the top 10 players that include the likes of Blackstone, Brookfield, Starwood and Carlyle. “The market, on the fundraising side, seems to be skewing towards the branded players, the larger funds and the players who have multiple products for investors to choose from,” says Carlock.
The mega-funds also are providing a strong tailwind to fundraising momentum. In September, Blackstone announced the final close of its latest global real estate fund, Blackstone Real Estate Partners IX. The fund closed with $20.5 billion of total capital commitments, which marked the largest real estate fund ever raised. Blackstone is also currently investing two regional opportunistic funds, the $7.2 billion BREP Asia II and a €7.9 billion ($8.8 billion) BREP Europe V.
The large sovereigns and institutions are driven to consolidate mangers or vendors. So, they seem to be splitting large pots of money between fewer managers that offer multiple different products and risk profiles, says Carlock. Those managers are benefitting from the ability to raise more money faster, because they are able to take advantage of those investor preferences. That being said, HNW family office funds tend to be more indifferent and are choosing funds based on strategies that resonate with them the most, he says.
Investors recalibrate strategies
Preqin data shows that fund managers are making progress in putting capital to work. Despite the record year of fundraising, dry powder did drop slightly from a high of $331 billion at the end of 2018 to $319 billion at the end of 2019.
One byproduct of the mega-size funds is that it will likely continue to fuel large, entity-level transactions in the coming year as funds work to write bigger checks to put capital to work. For example, Blackstone announced in September that it would buy Colony Industrial, the warehouse unit of Colony Capital Inc., for $5.9 billion. The deal includes about 60 million sq. ft. of warehouse space across the U.S. markets.
The question for investors in 2020 is how to strategically deploy real estate allocations. “There is more focus among our investor base, on a global basis, on what is the right mix within real estate across sectors, across geographies and across risk profiles,” says McNamara. In particular, risk management is a key topic of conversation with investors. The emphasis has shifted from, what is the upside potential? to how do we mitigate downside risk? he says.
Some investors are gravitating to lower risk core and core-plus funds and reducing exposure to more risky value-add and opportunistic strategies. After a pause late last year, there also is an increased in appetite for credit/debt strategies. Another key trend to watch in private equity real estate funds is how much of capital earmarked for private equity real estate will start shifting to infrastructure funds. “We continue to see the evolution and growth of real estate portfolios into broader real asset categories, like infrastructure,” says McNamara. “That is a trend that will continue, as real estate specific allocations grow, so to do real asset allocations where investors are looking holistically across real estate and other real estate like categories.”