Changing market conditions have seen the distressed and debt focused real estate sector grow from 7% of the overall market in 2006 to a significant 36% of real estate funds currently on the road.
Historically the distressed and debt focused real estate fund market has made up a relatively small part of the overall closed-end real estate market. With an abundance of opportunities in the opportunistic and value added market, there were only limited opportunities for distressed and debt players to cover, and only limited support from institutional investors. There were still some specialist private equity real estate fund managers focusing on the area, with some significant funds being raised by the likes of Lone Star, but the focus of the industry was firmly on the opportunistic and value added side.
The real estate industry was amongst the first to feel the effects following the onset of the credit crunch and resulting change in global economic conditions. The credit crunch has resulted in a number of real estate fund managers, operators and owners becoming distressed, looking to refinance projects, sell off properties, or completely unable to pay back loans. In such a market, the opportunities for traditional closed-end funds have become more limited, with financing deals in particular becoming increasingly challenging.
The increase in funds focusing on opportunities in the distressed and debt real estate market is the culmination of these two factors - the market has become increasingly distressed, while traditional opportunities and sources of financing have become more scarce. In order to take advantage of this market, distressed and debt focused real estate firms have increased fund sizes and become more active, and in addition there have been a number of real estate fund managers normally associated with the opportunistic and value added market moving into this area for the first time. In addition to raising dedicated vehicles, some managers of opportunistic funds are also using increasingly large portions of their vehicles to invest in distressed situations.
For more information on the distressed and debt focused real estate sector, please see the 2009 Preqin Real Estate Distressed and Debt Review .