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Greener Pastures Ahead for Land-Focused Private Real Estate Funds? – November 2015

by Daniel Wright

  • 03 Nov 2015
  • RE

Preqin’s Real Estate Online service tracks six land-focused real estate funds currently in market, targeting $1.4bn in institutional capital commitments. Both the number of funds and the aggregate capital targeted have remained similar to this time in 2014, when six funds were targeting $1.6bn. The largest land-focused funds currently in market are Sunbelt Land High Growth Equity Fund and Sunbelt Land High Yield Debt Fund, with each targeting $500mn of institutional capital and managed by Sunbelt Housing Management. 

Thirty-seven primarily land-focused vehicles have closed since 2006, cumulatively raising $8.7bn. The peak for fundraising was 2006, buoyed by the $1.2bn final close of Cherokee Investment Partners IV, the largest ever land-focused vehicle. Following the financial crisis and a period of subdued fundraising, 2012 saw a recovery in terms of the number of funds to pre-crisis levels; however, only $0.6bn was raised for land-focused funds. Recent years have seen very little activity, most likely due to a decline in institutional investor appetite, a lack of fund managers active in the space and a rise in number and capital secured by other niche property types.

Due to the higher risk characteristics of investing in undeveloped land, the vast majority (86%) of all primarily land-focused funds historically have utilized either opportunistic or value added strategies, as do all funds currently in market. In terms of geographic focus, 68% of land-focused private real estate funds closed since 2006 have targeted North America, while Europe- and Asia-focused funds each represent 11% of funds closed.

While there has been a decline in land-focused funds reaching a final close in recent years, some investors will continue to allocate capital to such vehicles as part of their real estate strategy. Castlelake held a final close for its Land Opportunities fund last year on $122mn, focusing on US residential land development. From a fund manager perspective, land-focused vehicles can bypass some complexities of other property focuses, particularly the large expenditure from asset management, which could equate to higher returns to investors.

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