Many listed alternatives managers revealed either negative or flat real estate returns in 2023.
February 28, 2024 (Preqin News) – Returns from real estate investments continued to suffer at the hands of higher borrowing costs in the final months of 2023, listed GPs revealed during their fourth-quarter results. For some, however, ample investment opportunities may lie on the horizon.
‘We are now actively investing and the current market backdrop is one of the most interesting environments we’ve seen since the early 2000s for real estate credit given the dynamics of higher rates, declining asset values, and a significant pullback in commercial real estate lending,' Jon Winkelried, CEO of TPG, stated during his firm’s earnings call. ‘Our strategy is purpose-built for this part of the cycle, and we intend to continue to raise capital in 2024’,
The subdued returns in real estate reported by listed GPs comes amid a tempering of investor sentiment. Fourth-quarter fundraising was the weakest in at least five years, according to the Real Estate Q4 2023: Preqin Quarterly Update. Overall capital raised for the year was $142bn, a drop of more than 50% compared with 2022 ($290bn).
Nonetheless, some fund managers are optimistic that a potential bottoming out of the asset class could provide opportunities. Blackstone – which announced a take-private of Canadian real estate firm Tricon for $3.5bn in the first quarter of 2024 – is expecting an improved real estate exit environment in the coming years.
‘We believe values in commercial real estate are bottoming. This doesn't mean there won’t be more troubled real estate investments to come in the market, particularly in the office sector, which was set up during a period when borrowing costs were much lower. Nor does it mean we won't see a slowing in fundamentals in certain sectors with excess near-term supply,’ Jonathan Gray, President of the Blackstone Group, said on the earnings call.
Most listed GPs reported negative or flat real estate returns in 2023, although the performance was not unique to private markets, with the S&P 500 Real Estate providing a three-year return of 1.14%.
Below are some of the key takeaways from the earnings calls:
Blackstone
Blackstone’s opportunistic real estate operations posted a –6.3% gross return in 2023, while its core-plus real estate portfolio returned -4.3% over the same timeframe.
The firm’s real estate realizations outweighed deployments in 2023 ($18.7bn vs. $15bn), in contrast to its 2023 infrastructure results.
Real estate assets under management (AUM) was reported at $336.9bn at the end of 2023, an increase of 3% from a year earlier.
Total real estate capital raised for the year stood at $53.9bn.
The firm currently has 10 real estate vehicles in market, including six open-ended funds, across Asia, Europe, and North America. Blackstone Real Estate Partners Europe VII is currently on its third close, targeting $9.5bn, according to Preqin data.
‘After investors have taken losses, even if they’re modest losses, there tends to be caution. Real estate, because of the lag on when challenges materialize, will have several negative headlines coming out over the year. And so what happens is, I think investors tend to take their time in terms of pivoting back to the space,’ Jonathan Gray, President of Blackstone, said on the earnings call.
Brookfield
Brookfield Asset Management did not report asset-class level returns for 2023, but its 2021 flagship fund, Brookfield Strategic Real Estate Partners IV, is currently reporting an 11% gross return (8% net), as of the end of Q4 2023.
Brookfield’s real estate AUM was reported at $276bn, a 4.9% increase since 2022.
The firm raised $8.3bn in 2023 and deployed $7.7bn, targeting housing, retail, and office properties. Uncalled capital commitments for the firm’s real estate business stood at $13bn.
Brookfield currently has 6 real estate funds in market, three of which are open-ended. The firm’s fifth flagship real estate strategy, ‘Brookfield Strategic Real Estate Partners V’ achieved a first close of $8bn in Q4 and the firm expects it to reach final close later this year.
‘With the breadth of our real estate franchise, and how we fund our businesses, we’re in a great position to ride through this environment and continue to keep refinancing our businesses. The one thing that’s often being overlooked in the real estate market right now is high-quality underlying assets are performing exceptionally well,’ Connor Teskey, President of Brookfield, said on the earnings call.
Apollo Global Management
Apollo did not provide returns for its real estate segment but the firm’s 2020-vintage ‘Asia Real Estate II’ fund is currently showing a 3% net return, according to Preqin data.
The firm said its real estate portfolio had $71.3bn AUM at the end of 2023.
Apollo has one real estate fund currently in market – Apollo European Principal Finance Fund IV which is currently raising – as well as one open-ended vehicle.
KKR
KKR’s opportunistic real estate operations reported a 2% gross depreciation for 2023. The firm did not provide figures for its core-plus or credit strategies.
The firm’s real estate AUM stood at $70bn, with uncalled commitments across real asset strategies totaling $24.7bn.
KKR currently has eight real estate vehicles open for investment, including three core-plus, three opportunistic, and two debt strategies across Europe, Asia, and North America, according to Preqin data.
‘2023 was a year of transition in commercial real estate as macroeconomic uncertainty, interest rate hikes and property value declines muted activity. We expect 2024 to be a year of transactions, creating more opportunities for well-capitalized lenders to finance deals,’ Matt Salem, Partner, Head of Real Estate Credit, stated in a recent insights article.
Ares Management
Ares Management reported a 2.4% gross return in its US real estate portfolio, and a 4.8% depreciation in its European portfolio.
The firm’s new capital commitments for the year across real estate came to $6.2bn including US real estate ($1.9bn), European real estate ($1.1bn), non-traded REITs ($1.3bn), real estate debt ($1bn), and real estate secondaries ($0.9bn).
Ares reported real estate AUM of $49.7bn, while the firm deployed $4bn into the asset class in 2023.
According to Preqin data, Ares has seven real estate funds currently in market as well as three open ended vehicles, and which include core, opportunistic, and debt strategies.
‘Our global real estate portfolio continues to experience resilient fundamentals due to our allocation to the best performing sectors with 50% of the gross portfolio in industrial assets, 24% in multifamily and another 13% in similar adjacent sectors like student housing and self-storage,’ Michael Arougheti, Co-Founder and CEO of Ares Management, said on the earnings call.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.