Asset AllocationOctober 3, 2014

Private Real Estate: More Money, More Problems?

Fewer managers, fewer opportunities to invest, but record amounts of cash: Private real estate is a sector with issues to resolve.

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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.

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.