Diversified vs. Sector-Specific US-Focused Real Estate Funds – January 2014

by Olivia Harmsworth

  • 17 Jan 2014
  • RE

Although a large proportion of private real estate fund managers continue to follow a diversified approach, investors are increasingly seeking managers which can prove their expertise in a particular property sector, particularly when placing capital with smaller and mid-size managers. As a consequence, US-focused sector-specific funds (those that focus on investment in one real estate sector) have seen a significant increase in fundraising in recent years, and with these funds having often outperformed diversified real estate funds, this trend may be one that is set to continue in the coming year. 

Sector-specific US-focused funds have historically outperformed diversified funds, with 58% of sector-specific funds beating the median benchmark for all US-focused private real estate funds, compared to only 47% of diversified funds. A significant 30% of sector-specific funds have top quartile performance, compared to 20% of diversified funds. 

US-focused funds focusing on the industrial sector or niche sectors (such as student housing, senior home or medical assets) are overwhelmingly the strongest performers, with 50% of niche funds and 48% of industrial funds ranked as top quartile. Although only 11% of private real estate funds focusing on the hotel sector are top quartile performers, a significant 44% are in the second quartile. With the exception of retail-focused funds, over half of funds focusing on all other sectors perform in the top or second quartile.  

Sector-specific fundraising has increased notably in recent years, as investors have sought to place capital with managers with expertise in particular real estate sectors. This is demonstrated by the increase in the number of sector-specific US-focused funds closed since 2010, from 37 funds closed in 2010 to 54 in 2011. 2013 saw 39 sector-specific funds reach a final close, with the aggregate capital raised at its highest point since 2007, at $15bn. Though diversified funds still account for the majority of aggregate capital raised, at 64% in 2013, sector-specific funds have increased the proportion of capital they account for, from 24% in 2012 to 37% in 2013. 

When looking at fundraising by sector, US-focused funds focusing on residential investments have experienced the largest increase in aggregate capital raised, more than doubling from $4.3bn in 2012 to $9.2bn in 2013. Niche, industrial and retail-focused funds have also experienced an increase in fundraising, although funds focusing solely on offices have seen a decline in the aggregate capital raised. 

The vast majority (68%) of US-focused sector-specific funds closed in 2013 achieved or exceeded their target size, with a significant 21% raising 125% or more of their initial target size. Comparatively, 43% of diversified funds closed in this time period achieved or exceeded their target size. At the other end of the scale, 32% of diversified funds achieved less than 75% of their target size, compared to 18% of sector-specific funds.

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