Private real estate fundraising dropped sharply this year, with fewer funds closing and securing less investment, according to a new report.
Preqin tracked 306 funds closing as of the end of September, less than 45% of the number that closed in 2022. Aggregate capital raised in the first three quarters of 2023 came to $107.7bn (£85.9bn), or 56% of that raised throughout last year. The largest 10 funds’ closes accounted for 50% of total capital raised in first three quarters of 2023.
Preqin said the fall in fundraising and closings could be attributed to funds becoming saturated, as a greater number of funds seek capital in a difficult fundraising environment driven by higher interest rates.
But the firm said that although fundraising had “hit a wall in 2023”, the “door was open” for growth in 2024.
The report said high interest rates will continue to deter real estate fundraising and dealmaking in 2024, while also outlining a shift towards opportunistic and distressed strategies, and the need for small fund managers to adapt to the changing environment.
Dealmaking also remained subdued throughout the first nine months of 2023, due to higher interest rates dampening investment sentiment.
During that period, Preqin said, 2,918 real estate deals closed, with a total value of $88.8bn. This represents just 42% of the volume and a mere 35% of the value of 2022’s deal closes.
But the largest funds have benefited overall from the “higher for longer” interest rate picture. According to Preqin, macroeconomic-driven fears have resulted in investors finding safety and security in the largest funds. While the top ten largest funds closed in the first three quarters of 2023 accounted for 50%, they accounted for just 25% for the whole of last year.
This has squeezed first-time funds. During the first three quarters of 2023, first-time managers raised just $2.8bn, a substantial drop compared with the $15.2bn raised in the entirety of 2022.
Henry Lam, lead author of the report and AVP of research insights at Preqin, said: “Interest rate hikes in 2023, especially in Europe, have further weighed on global real estate investment sentiment as well as fundraising. While fund managers with huge scale are gaining greater market shares, middle or small-sized fund managers are still struggling to close their funds due to the increase in number of funds in the market.”
That said, Preqin found first-time, smaller funds may have been underestimated by investors, as they outperformed the median benchmark for their respective strategies when looking at funds of all sizes.
First-time North American funds achieved a median net IRR of 18%, over five times that of North American value-added funds with vintages between 2014 and 2016. However, they also demonstrated a higher degree of dispersion in performance, meaning the potential for outperformance is coupled with higher risks and uncertainties.
Preqin also picked up on the theme of a widening gap between the recovering Europe and APAC regions and the US. The office sector is the key driver, it said, with a notable drop in transaction volume in North America. Transaction for the territory in the first three quarters of 2023 amounted to just $8.6bn, a little more than a quarter of 2022’s total of $31bn. By contrast, Europe’s office transactions are at 40% and APAC at 29%.
And while North America held its spot as the region with the highest total deal volume, deals for the first three quarters of 2023 amounted to only a third of last year’s total.
Preqin added that it expected AUM growth in real estate to slow further in 2024, reaching $1.7tn. The growth rate of 13.4% between 2016 to 2022 is expected to more than halve to 6.2% for 2022 to 2028.
An investor survey conducted by Preqin in November showed that just under half of respondents identified opportunistic investments, or high-risk investments that typically require substantial redevelopment or new development, as offering the best real estate opportunities over the next 12 months.
Again the bigger funds are dominating, with Blackstone Real Estate Partners’ 10th global opportunistic fund reaching $30.4bn, and representing 60% of the total opportunistic fundraising globally across the first three quarters of 2023.
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