Capital Concentrates, but Private Real Estate GPs See Opportunity

Fundraising in H1 2020 saw heavy capital concentration, but new funds are coming to market as investors prepare fresh commitments

The private real estate fundraising environment in 2019 was challenging, but now it’s even tougher. Amid the economic uncertainty triggered by COVID-19, real estate transactions slowed and sector dynamics shifted, while lockdown restrictions introduced practical challenges for business activities such as conducting meetings and signing paperwork. 

The impact of the pandemic has also exacerbated the capital concentration that has characterized the private real estate fundraising market in recent years, with institutions narrowing their commitments to fewer and larger funds. For most managers, raising a fund is more difficult than ever.

Mega Funds Absorb Significant Capital 
The number of funds reaching a final close has plummeted so far this year. As shown in the chart below, just 58 private real estate funds reached a final close in Q2 2020, down 28% from 81 funds closed in Q1 2020 and 47% from Q2 2019 (110). That said, these 58 funds raised $41bn, which exceeds that of Q1 2020 and Q2 2019, and matches the 2019 quarterly average ($43bn). 

Despite the healthy total, capital was far from evenly shared. Eleven mega funds – funds raising $1bn or more – closed in Q2 2020, collectively securing 75% of aggregate capital raised in Q2 2020 and 45% of the H1 2020 total. For comparison, nine mega funds closed in Q2 2019, representing 59% of the quarterly total. Among funds closed in Q2 2020 was Blackstone Real Estate Partners Europe V, which secured $10.6bn to become the largest-ever dedicated Europe-focused real estate fund. Amid the uncertainty of the pandemic’s long-term influence on property trends, more investors are turning to the perceived safety of brand-name managers, in what was already a highly competitive fundraising market.

New Funds Have Come to Market
With 928 private real estate funds in market as of mid-July, including 72 targeting $1bn or more, competition is likely to intensify further still. To put this figure into context, just 139 funds reached a final close in H1 2020. 

That said, demand for real estate investment will increase. Valuations across the different real estate markets have been increasing in recent years, with strong performance creating more institutional demand and more competition for assets. The black swan event that was the coronavirus outbreak may lead to a reduction in valuations, giving rise to potential outperformance by funds able to deploy capital in a repriced environment. 

Indeed, we have seen a number of GPs launch new funds in Q2 2020 despite the competition and uncertainty in the market. And the range of vehicles being brought to market suggests opportunities extend across real estate sectors. In June, Nevada-based Dermody Properties launched Dermody Properties Industrial Fund III, targeting $800mn for opportunities in the US industrial sector, a particularly hot market given the recent surge in e-commerce activity. 

Several debt products also launched in Q2 2020. California-based Sabal Investment Holdings launched Sabal Strategic Opportunities to target dislocated prices in commercial real estate-backed structured credit securities. With a $600mn target, the debt-focused vehicle launched in response to the COVID-19 environment. In the UK, London-based Maya Capital is targeting £250mn to invest in UK retail, focusing on the regeneration of struggling assets. 

Investors Are Targeting Fresh Commitments 
Investors also see opportunities in private real estate in the second half of 2020. Preqin Pro tracked 122 institutional investor fund mandates in Q2 2020, which highlights the demand for the asset class despite the uncertainty. Forty percent of these mandates targeted opportunities on a global basis, while North America and Europe each featured in 43%. The most active investors are pension funds (29%) and family offices (16%), together representing 45% of all mandates issued in Q2 2020. Oregon State Treasury, for example, is looking to invest between $1bn and $1.4bn in real estate in 2020. The public pension fund’s long-term strategy involves over-weighting industrial and multi-family sectors. University of Texas Investment Management Company is also planning to be active in 2020, with $1bn planned for real estate investment as the endowment plan works to increase its exposure to the asset class over the longer term.

The private real estate market will continue to attract capital throughout this challenging environment and beyond. The potential for steady returns and diversification afforded by a real estate allocation is more important than ever. Couple this with fresh opportunities in a number of sectors and the possibility of declining valuations, and it becomes clear why many managers are actively looking to deploy capital in this environment. The challenges will be providing a competitive product in a crowded market, and identifying successful strategies in a changing world. 

This article is the fourth in a series analyzing the impact of COVID-19 on the private real estate market, produced in collaboration with our partner EisnerAmper. We discuss deals, fundraising, and other key trends in the industry.

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For more insights and analysis on the impact of the pandemic on alternative assets, take a look at our COVID-19 Knowledge Hub.