Distressed private real estate vehicles provide opportunities for fund managers to purchase properties below market value, which in turn gives funds opportunities to produce excellent returns for managers that have the capabilities to deal with the higher risk of the investment. Preqin’s Real Estate Online service tracks 104 distressed private real estate funds that have held a final close since 2009; as shown in the chart below, the number of dedicated distressed funds closing has been in decline year on year since 2011. However, in this time, the aggregate capital raised has fluctuated from a low of $3.9bn in 2012 to a peak of $12.9bn in 2013. With over half the year already gone, fundraising in 2015 does not look set to reach the level of 2014, despite four distressed funds having held a final close this year.
At present, there are 17 distressed real estate funds in market, targeting $7.5bn in institutional capital commitments. Eight of these vehicles have held a first or second close, which is a strong indication of continued investor interest in this strategy. The largest distressed real estate fund on the road is Oaktree Real Estate Opportunities Fund VII, which is targeting $3.5bn to focus primarily on distressed opportunities in real estate debt and restructurings. The vehicle will invest on a global basis, with an emphasis on investments in high-growth markets in the US.
The US is the primary geographic focus for distressed private real estate funds in market, with 14 funds targeting opportunities in the country. Two vehicles are targeting opportunities in Europe, with the remaining distressed fund targeting opportunities in Brazil. Of the 17 funds in market, 65% will take a diversified approach to property investments; the remaining 35% will primarily focus on residential properties.