2016 was a challenging year for private equity real estate (PERE) firms in terms of investment opportunities and deal flow. Over the past few years, PERE firms have increased their investment activity, with the number of deals completed by these firms increasing 180% from 2012 to 2015, while the amount of capital invested has nearly trebled. In 2016, however, PERE deal flow slowed, impacted by financial market volatility and political uncertainty. This is reflected in the chart below, with both the number of deals and aggregate deal value dipping below that of the previous year. In order to understand this trend and whether it is likely to continue, Preqin surveyed over 180 fund managers about how the PERE deal landscape had changed over the course of 2016 and their views for the year ahead, with the full results detailed in the 2017 Preqin Global Real Estate Report.
Deal Flow in 2016
The majority (59%) of respondents reported that the price of real estate assets had increased over the course of 2016, while the same proportion (59%) of private real estate managers believe it is more difficult to find attractive investment opportunities than it was 12 months ago. Asset valuations seem to be a driver of the slowdown in PERE deal flow due to the increased difficulty of deploying capital effectively. However, despite this sentiment, fund managers still committed more capital in 2016 than they did in 2014, reflecting that while deal flow may be down, there are still opportunities in the current marketplace. The question is, will this slowdown in PERE deal flow continue in 2017?
Plans for 2017
Valuations remain a concern going into 2017, with over half (52%) of respondents seeing high asset prices as the biggest challenge facing the industry. Despite these concerns, fund managers are optimistic about their ability to find attractive opportunities in 2017, with two-thirds of respondents planning to deploy more capital than in 2016. Furthermore, 85% of fund managers reported that they are currently reviewing more investment opportunities than 12 months ago, highlighting the potential for investment in 2017.
2017 so Far
According to Preqin’s Real Estate Online, 400 private equity real estate deals worth an aggregate $25bn have been completed as at the beginning of March 2017, as fund managers look to deploy more capital in 2017 than the previous year. Office, retail and residential assets have been the most sought-after property types, accounting for nearly three-quarters (73%) of deals completed in 2017. Notable deals completed so far include:
- CapitaLand’s purchase of a portfolio containing three office assets and one shopping mall for JPY 49.7bn ($435mn) in February 2017. All four properties are located in Tokyo, Japan.
GI Partners’ acquisition of the GSK Global Vaccine Center from BioMed Realty, an affiliate of Blackstone Group, for $338mn in January 2017. The laboratory and medical office asset is located in Rockville, Maryland, and serves as a global vaccine research and development centre for GlaxoSmithKline.