LONDON, 13 December 2023 – Today Preqin, the global leader in alternative assets data, tools, and insights, published its Preqin Global Report 2024: Real Estate. The report shows that high interest rates will continue to deter real estate fundraising and dealmaking in 2024, while also outlining a shift towards opportunistic and distressed strategies, and the need for small fund managers to adapt to the changing environment. 

Real estate fundraising and deals  

Private real estate fundraising has dropped in 2023 to the end of September, with 306 funds closing – less than 45% of the number of funds that closed in 2022 as a whole, according to Preqin data. The report also finds that aggregate capital raised in the first three quarters of 2023 amounted to $107.7bn, which accounts for 56% of total capital raised throughout 2022.   

This fall in fundraising and funds closing can be attributed to funds in market becoming saturated, as a greater number of funds seek capital in a difficult fundraising environment driven by higher interest rates.  

Looking in greater detail, from the beginning of 2023 to the end of the third quarter, the number of real estate funds in market rose from 1,777 to 2,258 – a 27% increase. Deal making has also remained subdued throughout the first nine months of 2023 due to higher interest rates dampening investment sentiment. During that period, 2,918 real estate deals closed, with a total value of $88.8bn. This represents 42% and 35% of 2022 deal closes and value, respectively.   

Investors hesitant to look past large funds, squeezing first timers  

While the higher for longer interest rates have put pressure on real estate fundraising this year, the largest funds have benefited overall. According to Preqin analysts, macroeconomic-driven fears have resulted in investors finding safety and security in the largest funds. In terms of fund size and investor preference, the top ten largest funds closed in the first three quarters of 2023 accounted for 50% of the total capital raised. This is a notable increase compared to last year, when the top ten funds raised only 25% of the total. 

This boost for the largest funds has squeezed first-time funds, Preqin data shows. During the first three quarters of 2023, first-time managers raised $2.8bn – a substantial drop compared with the $15.2bn raised in the entirety of 2022. 

That said, Preqin analysts find that first-time, smaller funds may have been underestimated by investors. First-time real estate funds outperformed the median benchmark for their respective strategies when looking at funds of all sizes this year to the end of September. For example, first-time North American funds achieved a median net internal rate of return (IRR) of 18% – over five times that of North American value-added funds with vintages between 2014 and 2016. However, they also demonstrated a higher degree of dispersion in performance compared with more experienced funds. This indicates that while first-time funds have the potential to outperform, they also carry higher risks and uncertainties. 

Office sector a key driver of differing regional investment trends  

The office sector was a key driver of differing real estate investment trends in North America, compared to the Europe and the Asia-Pacific (APAC) region. The sector experienced a notable drop in transaction volume in North America, totaling $8.6bn in the first three quarters of 2023 – a little more than a quarter of 2022’s total of $31.0bn. In contrast, Europe and APAC office transactions account for a larger proportion of the total deal value of 40% and 29%, respectively, by the end of 2023’s third quarter when compared to 2022. 

Within this regional divergence, in-office working trends are impacting global real estate investment as workers return to the office at differing rates across the regions. For example, a number of en-bloc office transactions (where residents collectively agree to sell all units to one buyer) have closed in South Korea, with deal sizes ranging from $300mn to $550mn. This helped APAC’s quarterly total deal value to stabilize in the third quarter, rather than contract as it did in Europe. 

Henry Lam, lead author of the report and AVP of Research Insights, at Preqin says, “Interest rate hikes in 2023, especially in Europe, have further weighed on global real estate investment sentiment as well as fundraising. While fund managers with huge scale are gaining greater market shares, middle or small-sized fund managers are still struggling to close their funds due to the increase in number of funds in the market.”   

Additional key findings from the Preqin Global Report 2024: Real Estate include:   

AUM: Preqin analysts expect assets under management growth in real estate will slow in 2024 to hit $1.7tn. Annualized growth rates between the end of 2022 and 2028 are forecast to fall to 6.2% from 13.4% over the 2016 to 2022 period. 

• Strategy: As per Preqin’s investor survey conducted in November 2023, almost half (49%) of respondents identified opportunistic investments, or high-risk investments that typically require substantial redevelopment or new development, as offering the best real estate opportunities over the next 12 months. This aligns with opportunistic strategies showing promise in 2023. Preqin analysts suggest the current prominence of opportunistic strategies indicates a preference for capital growth over income returns in direct real estate investments.  

• Fundraising strategy: The closure of Blackstone Real Estate Partners X, the tenth in their global opportunistic fund series, played a significant role in the shift from core and core plus to opportunistic strategies. The fund’s final size reached an impressive $30.4bn, representing 60% of the total opportunistic fundraising globally across the first three quarters of 2023. 

• Deals: While North America held its spot as the region with the highest deal volume, the transaction volume for the first three quarters of 2023 amounted to only 34% of last year’s total. 

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