Private equity real estate funds in market swell to record level

• More than 2,000 real estate funds currently in market, Preqin data shows
• A total of 12 real estate debt funds closed in Q1, raising $5.3bn 
• Slow fundraising environment and growth in new vehicles combine to swell number of funds in market

May 15 (Preqin News) – A record number of private equity real estate funds are currently in market as investor caution slows fundraising and new vehicles launch. 

There are currently 2,035 real estate funds in market, seeking a total of $547.5bn, according to Preqin data. This is up from the 1,779 funds seeking $512bn at the start of the year.

The accumulation comes alongside a sharp fall in the number and value of funds closing. In the first quarter of this year, 92 funds closed, raising an aggregate $22.9bn, the lowest quarterly total since Q1 2013. However, value is set to rebound in the second quarter of 2023, given the April closure of the Blackstone Real Estate Partners X fund, which secured $30.4bn, just above its initial target of $30bn.

By strategy, value added (620 funds targeting $170.1bn), opportunistic (503 funds, $144.7bn), and core (407 funds, $83.6bn) account for the bulk of the pipeline, though there has been an increase in the number and value of PERE debt funds, with 242 funds seeking $83.7bn. The proportion of LPs targeting real estate debt over the next 12 months has seen the biggest increase of any strategy, from 18% in Q1 2022 to 38%, according to the Real Estate Q1 2023: Preqin Quarterly Update. 

‘As investment sentiment turns more pessimistic, investors may seek out lower-risk strategies,’ writes Gerard Minjoot, Analyst in Research Insights at Preqin. ‘In this case, real estate debt helps to hedge a portfolio’s downside risk while generating a steady income. Real estate debt could also form part of the solution to the liquidity crunch experienced by commercial real estate lenders.’

A total of 12 real estate debt funds closed in the first quarter, raising $5.3bn. Among them was the private US real estate credit arm of Morgan Stanley Investment Management, Mesa West Capital, which announced in February that it had raised around $1.37 billion for its Mesa West Real Estate Income Fund V, exceeding its original $1bn target. Meanwhile, real estate investment management advisor BentallGreenOak revealed that its GreenOak UK Secured Lending Fund III, targeting investments in the UK and across Europe, closed at £1.43bn ($1.79bn) in March, exceeding its £1bn target.

Preqin’s forward calendar, which estimates fund launches based on historic trends and capital deployment data, forecasts eight more funds will launch in 2023 from managers that raised $3.4bn via the previous generation of real estate debt funds. It expects activity will pick up further in 2024 as some of the largest fund managers come to market again.

In a moderately optimistic mid-year assessment of Europe’s real estate market  that envisaged falling inflation, a return to growth, and downside risks, fund manager AEW said debt refinancings posed a challenge. It estimated a combined debt funding gap (DFG) of €51bn over the next three years, with 21% of loans arranged over the 2018-2020 period being affected. It expects losses of 3.2% across those vintages, in line with historic European CMBS losses.

In the report, subtitled Light at the End of the Tunnel, AEW said: ‘To bridge this remaining debt funding gap, lenders and borrowers will have to be creative in re-structuring the complete capital stack.’