The last three years have been particularly difficult for investors and fund managers in the private real estate fund market, and organizations across the industry are still feeling the long-lasting effects of the financial crisis. In response to uncertain market conditions, a significant number of investors have halted their indirect real estate activity, and those that are making fund investments are doing so on a much smaller scale. There are some recent signs of improvement, but as the fundraising market remains extremely competitive, fund managers will need to work hard to stand out from the crowd
Real estate fundraising has been slow since 2009, with quarterly totals ranging from as little as $7.3bn in Q4 2010, to $15.7bn in Q1 2010. By the end of June 2011, only 54 funds had reached a final close in the year so far, raising an aggregate $21.7bn in investor equity. 2011 fundraising may therefore fall short of 2010 figures, when 131 funds raised a total of $44.7bn.
It is also taking firms significantly longer to hold final closes for their funds, with vehicles that closed in 2010 spending an average of 16.9 months in market, almost double the time funds that closed in 2007 spent in market before reaching a final close. Funds that held final closes between January and September 2011 needed an average of 16.1 months in market before reaching a final close. Although there has been a slight improvement in 2011, it is clear from these figures just how difficult it has been for fund managers to identify investors that are willing to invest, as well as how competitive the market is.
Despite slow fundraising, there are signs that the market may be improving, with recent research conducted by Preqin suggesting that an increasing number of the larger investors in the asset class are returning to market. A series of extensive interviews with 400 private real estate fund investors of varying size, location, and type, revealed that 35% of respondents expect to make fund commitments in the next 12 months, 49% of respondents are unlikely to invest, and a further 16% have yet to decide whether they will be active in the coming year. The likelihood of committing to funds in the next 12 months increases parallel to respondents’ total assets, and 43% of institutions with more than $10bn in assets under management are looking to invest in private real estate funds in the next 12 months.
Another encouraging sign for fund managers is that the majority of investors are maintaining their target allocations to real estate and are not abandoning the private real estate fund market. 69% of all investors in private real estate funds are currently below their overall target allocations to real estate, 20% are at their targets and 11% are above their target allocations. This means that fundraising should pick up in the next few years as property markets stabilize, valuations improve, and investors seek to meet their strategic asset allocation