The Rise of Opportunistic Real Estate – April 2014 (Part I)

by Olivia Harmsworth

  • 17 Apr 2014
  • RE

Private real estate fundraising has improved considerably in recent years, increasing from a low of $47bn raised by 186 funds reaching a final close in 2010 to 177 funds raising an aggregate $81bn in 2013. With concerns over the availability and pricing of prime real estate, many institutional investors are increasingly moving up the risk/return curve and there has been a notable increase in appetite for opportunistic funds, a trend fund managers have been quick to capitalize on.

Preqin’s Real Estate Online service shows that investor appetite for opportunistic private real estate funds has increased considerably since the start of 2012, from 42% of investors including this strategy within their fund searches for the following 12 months in Q1 2012 to 59% in Q1 2014. As investors move towards a preference for higher-risk investments, appetite for core real estate funds has correspondingly declined. Just 35% of investors are targeting the lower-risk strategy in their investment plans for the next 12 months as of Q1 2014, a significant decline from the 52% of investors which targeted this strategy in 12 months from Q1 2013. The majority of investors targeting opportunistic real estate funds in the next 12 months are based in North America, with 64% located in the region. Twenty-one percent of investors are based in Europe and 11% in Asia.

Corresponding with the growth in investor appetite for the strategy, fundraising for primarily opportunistic private real estate funds improved considerably in 2012, with 80 funds raising a total of $35bn in investor capital, a significant increase on the $20bn raised by 69 opportunistic funds closed the previous year. 2013 saw the number of opportunistic funds reaching a final close decrease to 57, although the aggregate capital raised remained similar at $36bn, demonstrating that capital is increasingly concentrated among fewer, more experienced fund managers.

Additionally, fundraising for primarily core funds more than halved from 2012 to 2013, decreasing from 35 funds raising an aggregate $6.5bn in 2012 to just 11 funds closed in 2013 raising a total of $2.3bn. Although this demonstrates the overall shift in sentiment among investors for a move up the risk/return spectrum, the capital raised by opportunistic real estate funds in 2013 was still less than half that raised in 2008.

Regionally, North America is the predominant focus for opportunistic private real estate funds, with 71% of capital raised by primarily opportunistic funds closed in 2013 to March 2014 focusing on the region. Interestingly, Asia is the second most targeted region by opportunistic funds, with 15 funds raising a total of $6.1bn for investment in the region from 2013 to 2014 so far. The relative lack of availability of core assets in some Asian markets means a large proportion of private funds targeting the region are focused on opportunistic investments. Seven primarily opportunistic funds raised an aggregate $4.2bn for investment in Europe in 2013 to March 2014.

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