The private real estate industry has recovered considerably since 2008, with assets under management of closed-end private real estate funds reaching an all-time high of $673mn as of September 2013. The majority of fund managers plan to put more capital to work in the year ahead compared to the past 12 months and, with lenders’ confidence also returning, most managers are seeing an improvement in the availability of finance. However, a consequence of increasing optimism and activity is an increase in competition, with managers seeing a more competitive environment when targeting both core and non-core assets. Using extracts from the recently-released Preqin Special Report: Real Estate Fund Manager Outlook, this blog examines the views and investment plans of over 100 real estate fund managers in order to discover their views on the industry, their plans for the coming year and the issues affecting their businesses today.
As of June 2014, dry powder for closed-end private real estate funds stood at $205bn, increasing by almost $50bn in the past 18 months. North America accounts for the majority of global dry powder, standing at $110bn as of June 2014, a 24% increase since December 2012. Europe-focused private real estate funds have $59bn, a 69% increase from December 2012, demonstrating the improvement in the European real estate fundraising market in this time period. Asia-focused dry powder currently stands at approximately $28bn, with dry powder for other regions at $9bn.
Many fund managers expect to draw on these reserves of dry powder and most are looking to be increasingly active in real estate in the year ahead, with 37% of fund managers surveyed by Preqin planning to invest significantly more capital in real estate assets in the next 12 months, and 26% of managers intending to invest slightly more capital than they invested in the past year. Just 14% of managers plan on investing significantly or slightly less capital in the year ahead, demonstrating the overall positivity felt by fund managers regarding the opportunities available in the market. However, there are regional variations; North American firms are the most positive, with 63% planning to invest slightly or significantly more in the next year, compared to 59% of Europe-based managers and 50% of Asia-based managers.
The increase in private equity real estate activity in recent years can be seen when examining the amount of capital called from, and distributed to investors in closed-end real estate funds. 2012 saw $130bn of equity invested in real estate, the most capital ever invested by private real estate firms in a single year. There is a clear upward trend in capital distributed to investors since the low point of 2009, when just $18bn was distributed, compared to $67bn for 2012, demonstrating that many firms are now exiting their investments to realize gains. Between January and September 2013, an all-time high of $73bn was returned to investors, outstripping the $55bn of capital called in this time period. With capital distributions increasing as more assets are sold, previously tied-up capital is released back to investors, enabling them to re-up with existing managers or to commit to new funds, which is likely to lead to further industry growth.