Private Real Estate: More Money, More Problems?

The unlisted real estate sector is becoming more concentrated with fewer managers operating larger funds, Preqin research has shown.

Private real estate funds that have closed this year have raised an average of $546 million, the data company said, a record high. However, this was down to “larger funds being raised by fewer managers.”

Among the funds closed in the third quarter was the Lone Star Fund IX, which raised $7.2 billion for a new global portfolio. But Preqin’s research also indicated that it is taking real estate funds longer on average to hit their targets. Funds closed so far in 2014 were in the market for an average of 19 months to raise capital, compared to 16 months in 2009 and just nine months in 2007.

“With a wall of capital chasing deals and pricing increasing, they will have to work hard to find value in an increasingly competitive marketplace.”—Andrew Moylan, PreqinAt the start of Q4, Preqin said there were 461 real estate funds seeking capital from investors, targeting an aggregate $156 billion.

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In the third fiscal quarter, 28 funds closed, the lowest number in three years, while the quarter’s aggregate $17 billion total capital raised was the lowest amount since the first quarter of 2013. However, the 2014 total of $62 billion exceeds the $57 billion raised in the first three quarters of last year, indicating a strong overall year is likely.

Andrew Moylan, head of real assets products at Preqin, said there had been “several consecutive quarters of strong fundraising” in the sector, which reflected a “growing institutional investor appetite for real estate funds.”

However, opportunities to put this money to work have not been forthcoming: Private real estate funds now have a record amount of dry powder at their disposal—$220 billion at the end of September.

“Fund managers are largely confident they can put this capital to work, with 63% of managers expecting to invest more capital in the coming 12 months than they did in the past year, but with a wall of capital chasing deals and pricing increasing, they will have to work hard to find value in an increasingly competitive marketplace,” Moylan said.

The final quarter of 2014 is to see a major pick up in private equity activity, according to Preqin, with major fundraising already underway and record levels of dry powder.

An aggregate $73 billion was raised by private equity funds that closed in the third quarter, Preqin said. This was the lowest quarterly total in three years.

But a record 2,205 funds are currently seeking capital from investors, with an aggregate target of $774 billion, which Preqin said pointed to increased levels of activity in the fourth quarter and into 2015. These figures include buyout funds from Blackstone, TPG Partners, and Hellman & Friedman, all of which are seeking more than $8 billion each. preqin-funds-seeking-031014

Christopher Elvin, head of private equity products at Preqin, said: “This quarter’s private equity fundraising fell short of the $100 billion mark for the first time in over a year, with the lack of mega buyout funds closing undoubtedly a factor that contributed to these lower fundraising figures.

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“However, the third quarter of the year is typically a quieter one for the industry, and with several mega funds currently in market, fundraising is likely to pick up again towards the end of the year.”

Private equity funds are also sitting on $1.2 trillion of cash yet to be deployed, an all-time high. For buyout funds alone, Preqin said the level of dry powder was $464 billion, the highest since December 2009.

Separate research by Preqin revealed that closed-end private real estate funds also have record levels of uninvested capital, with $220 billion of dry powder. preqin-dry-powder-031014

Despite the low levels of activity in Q3, August saw both the largest private equity-backed buyout investment and the largest exit if the year. 3G Capital’s investment in Canadian coffee chain Tim Hortons was valued at $11.5 billion, while a group of investors including the Canada Pension Plan Investment Board exited their investment in UK pharmaceutical outlet Alliance Boots for $15 billion.