2018 has proven to be a difficult fundraising year, with increased competition and market uncertainty providing a tough environment to reach that final close.
According to Preqin data, the number of private real estate funds closed and aggregate capital secured has decreased for three successive quarters to Q3 2018. This being said, a greater amount of capital was secured in the period Q3 2018 YTD ($97bn) than that of the same period in 2017 ($84bn) and 2016 ($92bn). With fewer funds raising more capital, capital concentration in the market continues – in part driven by investor allocations to the larger brands amid concerns over high valuations and the level of uncertainty in the market.
“Debt strategies continue to attract capital”
A distinct trend in recent private equity fundraising is the rise of real estate debt strategies. As the narrative surrounding a potential correction increases, investors have been looking to debt exposure not only for steady returns, but for protection against a possible decrease in real estate equity value. This being said, much of the capital committed in 2018 has been secured by higher risk strategies with opportunistic and value added strategies, accounting for the majority of capital raised in 2018 as at Q3 2018.
“Rising valuations lead to reduced returns”
Valuations remain a key concern in the market place for investors and fund managers alike. The level of current property prices are leading fund managers to reduce the targeted returns of funds brought to market: of the 123 private real estate fund managers surveyed by Preqin in November 2018, 64% reduced the targeted returns of new offerings specifically because of property valuations. Investors are still committed to the real estate despite these concerns – however, effectively deploying capital in the real estate market remains a challenge.
While 2018 fundraising levels look set to pass the $100bn landmark for the sixth consecutive year, the activity in the final months of 2018 will determine whether the annual total will surpass that of 2017, following two years of decreasing fundraising totals.
To see the full 2018 fundraising results and how investors are approaching private real estate investment in 2019, register to receive your free copy of the EisnerAmper 2019 Private Equity Real Estate Market Outlook when it is released in March 2019 here.