Driving fundraising success: a possible future of real estate investment
Private real estate fundraising remains an uneven process. Signs at the beginning of the year pointed to a potential slowdown in both the number of new funds, and the total amount of new investment. And yet, while the amount of investment in 2018 fell over 10% to about $110 billion, analysts have noted that that number still crested the $100 billion mark for the sixth year running.
In the light of those numbers, what are some trends that real estate deal sponsors should beware of? Are investors rewarding particular strategies? What particular corners of the market should fundraisers focus their efforts on? This article looks at some of the available information and sketches out a possible future for fundraising success.
Nevertheless, there are signs that real estate fundraising is starting to mature and develop in new ways moving into the latter half of 2019. While 40% of new investment funds in the first half of 2019 completed the fundraising stage quickly (under 12 months), 38% percent spent more than 18 months in the market. This divergence means that while many fund managers can execute on fundraising quickly, a sizeable portion take significantly more time to have their funds fully subscribed. This “tale of two funds” may dominate the fundraising process for the immediate future; look for funds that achieve their targets quickly, and avoid the ones that have lingered in the fundraising stage for over six months. The size of the fundraising effort may influence this tale. Small funds may complete the fundraising stage more quickly, but at the same time large funds (funds over £1 billion) are increasing their share of the market.
What other real estate fundraising trends can we detect in the current landscape? There are at least two others. First, riskier investment strategies in opportunistic and value-added funds are garnering most of the investors’ attention. Second, the relationship between real estate and real assets continues to shape opportunities for each.
Opportunistic and value-added funds
The figures from Q1 2019 tell the tale clearly. $29 billion in funds which reached final market close during the quarter. Of that total, about $9 billion went into real estate debt funds, which aim to minimise risk by focusing on loans to selected borrowers and working towards specific goals. Less than a billion dollars went into funds focused on core property investments, among the least-risky of the equity-based real estate investment vehicles. That leaves nearly $20 billion which investors placed into funds focused on opportunistic and value-added strategies. These funds seek properties in need of physical improvement, better management, increased marketing, or any number of other upgrades to their existing qualities. Value-added strategies are riskier than core real estate investments; opportunistic strategies even more so (source).
Nevertheless, these strategies received the lion’s share of investors’ money, and signs point to that trend continuing. The future of real estate fundraising appears riskier, at a strategic level, than was the case previously.
Real assets and real estate
Real assets incorporates real estate as well as land, commodities, natural resources - nearly anything which is not a financial asset, such as stocks and bonds. Prior to the global financial crisis, real estate accounted for an overly-large percentage of the investment in real assets, nearly 70%. In today’s environment, a number of factors from investor caution to tighter lending restrictions have kept the level of real estate investment from climbing too high in comparison to the rest of the real asset market. Nevertheless, given the advanced real estate cycle, alternative investment strategies hold a lot of appeal for savvy investors.
Fundraisers looking to the future can see a path laid out for them, one which maintains a focus on real estate while also including other real assets. That same future, unfortunately, looks riskier, as on the whole investors have lately preferred funds with riskier profiles. Finally, managers of real estate funds would do well to examine the niche markets: student housing, data centers, and healthcare-related real estate are sectors of the broader real estate market which have out-performed.
The possible future thus described does appear riskier, and goes against some accepted wisdom. And of course, no sponsor can guarantee success, regardless of the investment strategy used. But overall this future fits with the given information, about investments and investors that reward risk but still seek security. Sponsors take note, and fundraise accordingly!