Real Estate Deals In Q2 2016 by Preqin
Fundraising In Q2 2016
Q2 2016 saw the lowest number (32) of funds close in a single quarter in over 12 years. However, despite nearly half the number of funds closing compared to Q1, the aggregate capital raised was $2.8bn higher at $26.7bn (Fig. 1). This high concentration of capital was the result of two large fund closures by Brookfield Asset Management and Lone Star Funds, which secured $9bn and $5.9bn respectively, accounting for 56% of all capital secured during Q2 2016.
With both of these mega funds utilizing a primarily opportunistic strategy, it is unsurprising that this strategy dominated fundraising in the quarter, securing $16.8bn from just nine funds reaching a final close (Fig. 2). There continues to be demand for higher risk investment strategies, with only four lower risk core and core-plus funds closed in Q2 2016 securing an aggregate $2.2bn.
Despite half the number of North America- and Europe-focused funds reaching a final close in Q2 2016 compared to Q1, the aggregate amount of capital raised by these funds increased over the same period, with North America remaining the dominant region (Fig. 3). The second quarter of 2016 saw funds focused outside North America, Europe and Asia record an increase of $1bn in aggregate capital raised from Q1 2016, buoyed by the $500mn closure of Actis Africa Real Estate Fund 3.
The average time taken for funds to reach a final close has dropped slightly from 19 months for funds closed in 2015 to 18 months for funds closed in H1 2016, but remains relatively similar to the average fundraising periods seen in recent years (Fig. 4). The majority (52%) of funds reaching a final close in the first half of 2016 exceeded their fundraising target, a significantly larger proportion than for those funds closed in 2015 (Fig. 5).
Funds in Market
The number of closed-end private real estate funds in market now stands at a record 505 vehicles, which are looking to raise an aggregate $175bn as at the start of Q3 2016 (Fig. 1). North America remains the most targeted region for private real estate funds, with 61% of funds in market primarily focused on opportunities within the region, with the majority (57%) of targeted capital also focused on the region (Fig. 2). Europe-focused vehicles account for a fifth of funds in market, followed by those targeting Asia (11%).
As seen in Fig. 3, fundraising is still a long process for many firms: 53% of funds currently in market have been seeking institutional capital for over a year, including nearly a quarter of funds that have been on the road for over two years. In addition, 40% of funds that have yet to hold an interim close have been on the road for over 12 months.
The five largest private real estate funds in market are currently targeting a combined $22bn. Four of the top five largest funds in market utilize debt strategies, including Lone Star Fund X, the only fund in the top five that is new to market in Q2 2016.
Real Estate Deals
As a result of two large transactions, the second quarter of 2016 saw a significant increase in the proportion of aggregate private equity real estate (PERE) deal value accounted for by mixed-use assets, despite the number of deals for this property type remaining level with Q1 (Fig. 1). Office assets represented the largest proportion of both the number of deals (27%) and aggregate value (29%) in Q2.
Assets of over 500,000ft2 purchased in Q2 2016 account for the majority (54%) of aggregate deal value, despite representing just a fi fth of the number of deals. Correspondingly, the proportion of aggregate deal value represented by smaller properties (under 200,000ft2) fell in Q2 2016, despite the proportion of deals increasing slightly from Q1 2016 (Fig. 2).
North American assets were the most targeted region for PERE deals in Q2 2016, accounting for over two-thirds (69%) of all deals (Fig. 3). Just over a quarter (26%) of all deals in Q2 were completed for European assets, while transactions involving PERE firms in all other regions were much less prevalent: one in 20 deals in Q2 were for assets outside North America and Europe.
While the proportion of completed portfolio deals increased from Q1 to Q2, the proportion of aggregate value declined for multi-asset transactions (Fig. 4). This can be attributed to some large single-asset transactions in the quarter (Fig. 5): all of the top five single-asset deals were completed for higher values than the largest portfolio transaction, the $700mn acquisition of Jehovah’s Witnesses’ diversified portfolio of New York-based assets by Kushner Companies, RFR Realty and LIVWRK (Fig. 6). While the US typically dominates deal fl ow, the largest deal completed in the quarter was BlackRock’s sale of a Singaporean mixed-use asset, Asia Square Tower 1, to Qatar Investment Authority for $2.45bn.
Institutional Investors in Private Real Estate
The majority (51%) of private real estate investors seeking new commitments will target core funds over the next 12 months, while the proportion targeting value added vehicles has declined by twelve percentage points since Q2 2015 (Fig. 1). This perhaps suggests that investors, concerned about the medium-term prospects for real estate, are being more conservative in their approaches. Despite this, higher risk strategies are still sought after, with investors displaying a relatively similar preference for investing in core, value added and opportunistic vehicles in the next 12 months.
Geographically, more active private real estate investors will be targeting Europe in the next year than North America, a reversal from Q2 2015 when the proportion of investors seeking opportunities in North America greatly eclipsed those seeking Europe (Fig. 2). Interest in the Asia-Pacific region has grown since Q2 2015, while investors are seeking less opportunities in emerging markets and other geographies outside the more traditional regions.
A greater proportion of real estate investors are targeting a lower number of fund commitments in the next year compared to results seen in Q1 2016; 54% of active investors plan to commit to three funds or fewer (Fig. 3), while 41% planned the same in Q1 2016. However, the proportion of investors that are looking to commit over $300mn to the asset class over the next 12 months has increased from 13% in Q1 2016 to 19% in the second quarter of 2016 (Fig. 4). This is consistent with the trend seen in fundraising, with capital increasingly concentrated among a small number of the biggest firms.
Private real estate dry powder has continued to rise during the second quarter of this year and now stands at a record $238bn (Fig. 1). However, the rate of growth has slowed when compared to the previous quarter, having increased by approximately $20bn in the first three months of the year but only $8bn in the second.
As expected, the majority (55%) of global dry powder is focused on North American opportunities (Fig. 2). However, since the end of 2015, the proportion of estimated industry dry powder accounted for by Europe-focused funds has increased, while North America-focused funds have seen their share of uncalled capital decrease. With a growing amount of capital targeting European property, Europe-focused dry powder has increased by 21% since December 2015, a much higher growth rate than that of Asia- (12%) and North America-focused funds (10%).
Higher risk strategies continue to hold the largest proportions of available capital: opportunistic funds hold 45% of dry powder, while value added funds account for a quarter of the total (Fig. 3). Additionally, the levels of uncalled capital available to opportunistic and value added strategies have increased by 20% and 21% since the end of 2015, a significantly faster rate than any other strategy. Core strategies have experienced a 10% decline in available dry powder over the past six months.
Closed-end private real estate funds have experienced positive average changes in NAV for 22 consecutive quarters (Fig. 1). Furthermore, the PrEQIn Real Estate Index, which currently stands at 97.9 (rebased to 100 as of 31 December 2007), is at its highest point since Q1 2008, as the growth seen in the first three quarters of 2015 drove the index up 13% (Fig. 2).
The median called-up, distributed and residual value ratios for private real estate funds reveal that, with the exception of only 2005, all vintage years to have paid distributions have median total value to paid-in capital (TVPI) greater than 100%, meaning more capital has been paid out or remains in fund portfolios than was initially invested (Fig. 3).
Since September 2012, real estate strategies have seen their three-year rolling horizon IRR increase from 1.3% to 15.0% three years later (Fig. 4). Despite this improvement, in the three years to September 2015, the horizon IRR for real estate was lower than other private capital strategies, with venture capital (+17.9%), buyout (+17.3%) and mezzanine (+15.6%) outperforming real estate.
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