Due to the adverse effects of the credit crunch, many real estate developers are struggling to find finance for new and existing projects. Traditional sources of capital have dried up, with banks reluctant to lend at the same rates as in previous years, leaving developers with compelling opportunities that cannot get off the ground, half-completed projects and debts that require refinancing.
Private equity real estate funds have been struggling to raise capital recently, with 2009 seeing the lowest level of fundraising since 2004. To date only 63 funds have reached a final close, raising an aggregate $30 billion. As a result, it would be natural to assume that this drop in fundraising would result in a drop in the amount of capital available for investments.
However, this is not the case and the amount of dry powder available to private equity real estate firms for investments is still very high. The amount of dry powder available across the private equity real estate industry remains at a similar level to recent years, with an estimated $143 billion available across all private equity real estate as of December 2008.
There are several reasons why the dry powder remains so high despite difficulties in fundraising. With the credit crunch, financing for deals has become much more difficult to come by, and resultantly deals have been limited and call-ups have slowed significantly. Additionally, some managers are reluctant to invest in these conditions, preferring to wait until the market has bottomed out. In some cases, fund managers have also been forced by investors to delay capital calls due to investors’ fears that they do not have the liquidity to meet these obligations, which means that the fund managers are sitting on large levels of dry powder.
To see more on this topic, please see this month’s issue of Real Estate Spotlight. For further information on private equity real estate fund managers with dry powder to invest in real estate projects please see our Real Estate Capital Source service.