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Monday, 26 February 2018

Capital Raised by Real Estate Funds Drops in 2017

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Commercial Real Estate Direct Staff Report

Last year, $111 billion of equity was raised on behalf of 265 commercial real estate investment funds, according to Preqin, marking the second annual decline in the amount of capital raised in the sector.

The London research company attributed the decline - $126 billion was raised in 2016 and $136 billion was raised in 2015, the most since 2008 - to concerns among investors that asset pricing has gotten too high and that interest rates will continue increasing.

While aggregate capital-raising declined by 11.9 percent, the average size of funds actually increased, to $450 million from $414 million a year earlier, which means the sector continues to get concentrated.

But Preqin found that the 20 largest funds were responsible for 42 percent of the capital raised last year. And the 10 largest accounted for 29 percent. In 2016, in contrast, the top-10 raised 37 percent of all capital and the top-20 raised 48 percent.

Meanwhile, a total of 52 percent of the funds that had their final closings last year exceeded their capital-raising targets.

Funds with a North American investment strategy remained the most popular, accounting for $69.7 billion, or 63 percent of the amount raised last year. And $36.5 billion of the amount raised, or one-third of the total, was earmarked for opportunistic funds. Another $34.9 billion, or 31.4 percent of the total, went to value-add funds. Meanwhile, $27.9 billion, or just more than a quarter, went toward debt-investment funds. That's an impressive increase from as recently as 2014, when $20 billion was raised for debt funds.

Only $7.3 billion, or 6.6 percent of the total raised, went to core or core-plus funds, which might indicate that investors are leery of plowing capital into properties whose prices might be at their cyclical peak. Real Capital Analytics last week reported that property prices had climbed by another 0.62 percent in January and were 8.14 percent higher than they were a year earlier. They're also nearly 88 percent higher than they were during their trough in May 2010 and 21.3 percent higher than they were during their previous peak in July 2007. While the higher prices make it more challenging for managers to find compelling investments, they also contribute to increases in assets under management.

Nonetheless, real estate remains a sought-after asset class among institutional investors. Preqin noted that real estate investment managers had $811 billion of assets under management as of last June, up from $780 billion a year earlier.

At the end of the year, dry powder, or the amount of capital ready to be invested, had climbed to $249 billion, another record, from $245 billion in June. A total of $148 billion of that is earmarked for investments in North America.

The reason for the increase in dry powder: the challenging investment climate, with too many deep-pocketed managers chasing too few attractive deals.

Comments? E-mail Orest Mandzy, or call him at (267) 327-4281.


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“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:

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  • Subject: Institutional Investment (INS), Opportunity Funds (OPPY)
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