Private real estate debt funds have seen unprecedented levels of capital flow into the strategy in 2017 - 2018, and fund managers now have more dry powder available to deploy than ever before. 2017 was a record fundraising year, as 63 funds raised just over $32bn – a significant increase from the previous record of $25bn set in 2014. 2018 looks set to match the record levels seen last year, with 40 funds raising $21bn in Q1-Q3. As such, dry powder available for debt funds to deploy has reached a new record of $57bn as at October, up from $50bn at the end of 2017.
However, even as real estate debt fundraising has grown, investor interest for the strategy has plummeted: in June 2017, more than a quarter (26%) of investors were targeting the strategy over the next 12 months: a year later in June 2018, just 6% of investors were planning to target the strategy over the coming year. Declining interest could be as a result of concerns about a market correction. Investor interest in lower-risk core and core-plus strategies has risen; 56% of investors have told Preqin they believe markets are at a peak, indicating that there is a shift towards perceived “safer” strategies in anticipation of a downturn.
Nevertheless, as at October 2018 there are 106 private real estate debt funds in market seeking an aggregate $40bn in capital. This is up from 98 funds that were seeking $37bn at the start of the year. The five largest funds account for over a quarter (28%) of capital targeted, an indication of future capital concentration. The largest fund alone, Cerberus Global NPL Fund, is targeting $4.0bn.
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