preqin quarterly update: real estate q2 2017...the information presented in preqin quarterly update:...

PREQIN QUARTERLY UPDATE:REAL ESTATEQ2 2017Insight on the quarter from the leading provider of alternative assets data

alternative assets. intelligent data.

Content includes:FundraisingFunds in MarketDeals Institutional Investors Dry Powder Fund Performance

© Preqin Ltd. 2017 / www.preqin.com2

PREQIN QUARTERLY UPDATE: REAL ESTATE, Q2 2017

FOREWORD - Andrew Moylan, Preqin

Figures for the second quarter of 2017 present a mixed view for participants in the asset class. The number of private real estate funds reaching a final close has declined for the second consecutive quarter, and the 45 funds closed represent the lowest quarterly total

since Q1 2010. However, significant levels of capital ($29bn) have been raised and this is expected to increase as more data becomes available. This does lead to the question: is there too much capital chasing too few opportunities?

On the one hand, fuelling concerns is the record level of dry powder waiting to be deployed: $246bn as at June 2017. On the other, fund managers have been able to find opportunities over Q2 despite this, with 887 private equity real estate transactions completed (up 15% on Q1). However, it is a seller’s market, with closed-end private real estate vehicles experiencing 26 consecutive quarters of NAV growth, which is helping private real estate portfolios perform strongly for investors in a low-return environment, delivering annualized returns of 13.8% in the three years to September 2016 (the most recent data available). Significantly, there is still residual value to be realized from older vehicles, which could yet further the high distributions investors have received in recent years.

Looking ahead, real estate firms will continue to find it challenging to raise capital; a record 557 private real estate funds are in market as at the beginning of Q3 2017, collectively targeting $177bn in aggregate capital. As can be seen from Q2 fundraising, the trend of large players increasingly dominating the marketplace has continued as investors place their faith and capital in the deal-sourcing capabilities of the largest players. Crucially for those looking to raise vehicles, while investors are still searching for higher-risk funds, larger proportions with active fund searches and mandates on Preqin’s Real Estate Online are now seeking core, core-plus and debt funds than at the same time last year.

We hope that you find this report useful and welcome any feedback you have. For more information, please visit www.preqin.com or contact [email protected].

REAL ESTATE ONLINE

Real Estate Online is the leading source of intelligence on the private real estate fund industry and is the only service that can provide information on all areas of the private real estate asset class, including institutional investors, fund, performance, deal and asset data. Get in touch today to arrange a demo of Real Estate Online: : [email protected] | : www.preqin.com/realestate

All rights reserved. The entire contents of Preqin Quarterly Update: Real Estate, Q2 2017 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Quarterly Update: Real Estate, Q2 2017 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Quarterly Update: Real Estate, Q2 2017. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Quarterly Update: Real Estate, Q2 2017 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Quarterly Update: Real Estate, Q2 2017 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.

p3 Fundraising

p5 Funds in Market

p6 Deals

p9 Institutional Investors

p10 Dry Powder

p11 Fund Performance


3

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FUNDRAISING

Private real estate fundraising picked up in Q2, with 45 funds reaching a final close for $29bn, representing a 33% increase

in capital raised from Q1 2017, despite 19 fewer fund closures (Fig. 1). Fundraising for Q2 2017 is above the average raised since 2010 ($25bn), yet capital concentration prevails, as the number of vehicles closed is at the lowest level since Q1 2010 (43).

One fund in particular – Blackstone Real Estate Partners Europe V – is responsible for a large proportion of the capital secured in the quarter, reaching a final close on €7.8bn and helping push opportunistic funds (Fig. 2) and Europe-focused funds (Fig. 3) to secure the largest proportions of capital in the quarter. Eighteen value added funds – the most funds closed for any strategy – secured $9.2bn in Q2 2017, $6.3bn more than in Q2 2016. Demand for higher-risk investment strategies continues as only seven core and core-plus funds closed in Q2 2017, securing just $0.9bn.

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Source: Preqin Real Estate Online

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Fig. 2: Closed-End Private Real Estate Fundraising in Q2 2017 by Primary Strategy

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Fig. 3: Closed-End Private Real Estate Fundraising in Q2 2017 by Primary Geographic Focus

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Date of Final Close

Fig. 1: Closed-End Private Real Estate Fundraising, Q1 2012 - Q2 2017

$29bnAmount of capital raised by

closed-end private real estate funds closed during the quarter.

53%Europe-focused funds represent over half the

aggregate capital raised by funds closed in Q2 2017.

74%Value added and opportunistic

funds accounted for almost three-quarters of total capital

raised in Q2 2017.

€7.8bn Amount of capital raised by

Blackstone Real Estate Partners Europe V, the largest fund

closed in the quarter.

KEY FACTS



Fig. 6: 10 Largest Private Real Estate Funds Closed in Q2 2017

Fund Firm Fund Size (mn) Strategy Geographic Focus

Blackstone Real Estate Partners Europe V Blackstone Group 7,800 EUR Distressed, Opportunistic West Europe

Kildare European Partners II Kildare Partners 1,950 USD Debt Europe

TCI Real Estate Partners Fund II The Children's Investment Fund Management 1,900 USD Debt US, West Europe

DRA Growth & Income Fund IX DRA Advisors 1,576 USD Value Added US

Walton Street Real Estate Fund VIII Walton Street Capital 1,313 USD Opportunistic, Value Added US

Exeter Industrial Value Fund IV Exeter Property Group 1,275 USD Value Added US

Pramerica Real Estate Capital VI PGIM Real Estate 1,010 GBP Debt, Value Added West Europe

RXR Real Estate Value Added Fund III RXR Realty 963 USD Value Added US

Harrison Street Real Estate Partners VI Harrison Street Real Estate Capital 950 USD Opportunistic US

Europe Property Fund IV BlackRock 764 USD Value Added Europe


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Fig. 4: Average Time Spent in Market by Closed-End Private Real Estate Funds, 2012 - H1 2017

Date of Final Close

14% 13% 14% 20% 16% 13%

34% 33% 35%39%

34% 40%

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Fig. 5: Closed-End Private Real Estate Funds by Proportion of Target Size Achieved, 2012 - H1 2017

Date of Final Close

In addition to the large increase in capital raised for Europe-focused funds (up from $2.1bn in Q1 to $16bn in Q2) the number of Europe-focused funds closed has more than doubled over this period. Conversely, the number of North America-focused funds closed has declined from Q1, although they have raised slightly more capital. Asia-focused fundraising activity has slowed over the last year, with just one fund reaching a final close in Q2 2017.

The amount of time real estate fund managers have spent marketing their offerings has remained relatively constant over the years, with an average 17 months spent on the road for funds closed in H1 2017 (Fig. 4). Funds closed continue to experience success, with almost two-fifths (37%) of funds reaching a final close in H1 2017 exceeding their target size (Fig. 5).


5


FUNDS IN MARKET

The number of private real estate funds on the road continues to reach new heights, with a record 557 funds in market at

the beginning of Q3 2017 (Fig. 7). Despite this, these vehicles are collectively targeting only $177bn in capital commitments, 6% less than the amount targeted at the start of 2017. Fifty-nine percent of funds currently in market have held at least one interim close, raising $61bn towards their respective targets.

The majority (58%) of funds in market will primarily target North America; these funds are seeking $107bn in institutional capital, 51% more than the total amount targeted by funds focused on other regions ($71bn, Fig. 8). While the aggregate capital targeted by North America-focused funds has increased by $7bn since Q2 2016, the corresponding figure for Europe-focused funds has dropped over the same period by $5bn.

With large numbers of funds in market, raising capital has become more competitive, and many funds therefore spend a long time marketing their vehicles. Forty-four percent of funds in market have spent more than a year and half raising capital, including 29% that have spent two years or more in market. These figures increase to 53% and 36% respectively for funds that have held one interim close.

Value added and opportunistic funds represent the largest proportions (35% and 24% respectively) of funds in market and collectively account for 59% of aggregate target capital (Fig. 9). Opportunistic funds make up four of the five largest funds in market, including the largest, Starwood Global Opportunity Fund XI (Fig. 10). The fund will look to invest equally across the US and Europe, seeking investments in a range of property types.

Fig. 10: Five Largest Closed-End Private Real Estate Funds in Market

Fund Firm Target Size ($bn) Strategy Geographic Focus

Starwood Global Opportunity Fund XI Starwood Capital Group 6.0 Debt, Distressed, Opportunistic, Value Added US, Europe

Carlyle Realty Partners VIII Carlyle Group 5.0 Opportunistic US

Brookfield Strategic Real Estate Partners III Brookfield Property Group 4.0 Opportunistic, Value Added Global

PIMCO Bravo Fund III PIMCO 3.5 Debt, Distressed, Opportunistic Global

Brookfield Real Estate Finance Fund V Brookfield Property Group 3.0 Debt US


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No. of Funds Raising Aggregate Capital Targeted ($bn)


Fig. 7: Closed-End Private Real Estate Funds in Market over Time, Q1 2013 - Q3 2017

65 16.3

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Fig. 9: Closed-End Private Real Estate Funds in Market by Primary Strategy

322 107

123 42

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Fig. 8: Closed-End Private Real Estate Funds in Market by Primary Geographic Focus



DEALS

Private equity real estate (PERE) deal flow has shown signs of recovery following the slow activity witnessed in Q1 2017 (Fig.

11). A total of 887 deals were completed in Q2 2017 for $63bn, 15% and 36% higher than Q1 2017 totals, respectively. Potentially as a result of the rising valuations of assets in PERE deals, 52% of the deals completed were valued at less than $50mn, which is the smallest figure for this size bracket in the period examined (Fig. 12).

The largest proportion (32%) of completed deals in Q2 were for office assets, in line with previous quarters (Fig. 13). While the proportion of retail acquisitions declined by four percentage points between Q2 2016 and Q2 2017, the proportion of aggregate deal value they represent has remained level over the period. Residential transactions were less prominent in Q2, representing just under a fifth of PERE transactions in the quarter (from 26% in Q4 2016); the proportion of aggregate value they represent also halved from Q4 2016 to 10%.

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$1bn or More

$500-999mn

$250-499mn

$100-249mn

$50-99mn

Less than$50mn


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ortio

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ls

Fig. 12: Private Equity Real Estate Deals by Size,Q1 2014 - Q2 2017

781

929 882

1,020 916

1,091 1,017

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of D

eals

Fig. 11: Private Equity Real Estate Deals, Q1 2014 - Q2 2017

Aggregate Deal Value ($bn)

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Fig. 13: Private Equity Real Estate Deals by Primary Asset Type, Q2 2016 - Q2 2017

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$63bnAggregate value of the 887

private equity real estate deals completed in Q2 2017.

44%of aggregate deal value in Q2

2017 was accounted for by portfolio deals, up from 28%

in Q2 2016.

55%of the total value of deals in Q2 was for assets of 500,000ft2 or

more in size.

CNY 55bn Value of Vanke's acquisition of

16 land development sites from Guangdong International Trust and Investment in June 2017.

KEY FACTS


7


16% 17% 16%28% 34%

44%

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Single Asset

Portfolio


Fig. 15: Private Equity Real Estate Deals by Transaction Type, Q2 2016 - Q2 2017

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Fig. 17: Five Largest Portfolio Private Equity Real Estate Deals Completed in Q2 2017

Asset Asset Type(s) Buyer Seller Deal Size (mn) Location(s) Deal

Date

Guangzhou, China, Land Development Portfolio Development Site Vanke Guangdong International

Trust and Investment 55,100 CNY China Jun-17

US, Retail Portfolio Regional Center, Mall, Retail QIC Global Real Estate Forest City Realty Trust 4,000 USD US May-17

US & Canada, Diversified Portfolio

Multi-Family, Niche, Residential, Senior Home,

Student HousingMapletree Investments Kayne Anderson Capital

Advisors 1,600 USD US, Canada Jun-17

European Logistics Portfolio

Industrial, Logistics, Office, Office Showroom,

Retail

AXA Investment Managers – Real Assets Gramercy Property Trust 1,000 EUR

France, Germany,

Netherlands, Poland, UK

May-17

US, Diversified Portfolio Industrial, Office Brookfield Property Group TA Realty 855 USD US Apr-17


38% 35% 28%12% 8% 6%

21% 25%26%

9% 12% 10%

27% 27%27%

34% 31%28%

14% 13% 19%

45% 49% 55%

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500,000ft² or More

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Less than 100,000ft²


Fig. 14: Private Equity Real Estate Deals by Asset Size,Q2 2016 - Q2 2017

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Fig. 16: Five Largest Single-Asset Private Equity Real Estate Deals Completed in Q2 2017

Asset Asset Type Buyer(s) Seller(s) Deal Size (mn) Location Deal

Date

Kam Sheung Road Station Site Land China Overseas Land & Investment, K. Wah

International, Sino Land Company Limited Unidentified Seller(s) 8,330 HKD Hong Kong May-17

Elizabeth House Office HB Reavis Group Chelsfield Partners, London and Regional Properties 600 GBP London May-17

85 Broad Street Office Callahan Capital Properties, Ivanhoe Cambridge

Beacon Capital Partners, MetLife Real Estate Investors 650 USD New York May-17

375 Hudson Street Office Trinity Real Estate, Norges Bank Investment Management Tishman Speyer 615 USD New York May-17

Cannon Place Office Deka Immobilien Investment, West Invest Hines 485 GBP London Apr-17


There were also fewer transactions for smaller properties (those less than 100,000ft2 in size), with their share of total PERE deals falling from 38% in Q2 2016 to 28% in Q2 2017; correspondingly, their proportion of deal value has fallen from 12% to 6% over the same period (Fig. 14). At the other end of the market, the largest properties (500,000ft2 or more) are growing their market share, and now just 19% of transactions in Q2 represent 55% of the aggregate value of deals.

The proportional increase in aggregate value for portfolio deals can be attributed to some large multi-asset transactions completed in Q2, including the largest portfolio deal of 2017, the CNY 55bn acquisition of land development sites from Guangdong International Trust and Investment (Fig. 17).

For more information about Preqin’s industry-leading Real Estate Online platform or to arrange a demo, please visit:

www.preqin.com/REO


65% of fund managers have seen competition for investor capital increase in the last year...*Helping you source investors for new funds.

44% of fund managers have changed service providers in the last year...*Helping you develop new business.

A record 511 real estate funds are being marketed...**Helping you source the best fund opportunities.

REAL ESTATE ONLINE: THE FOUNDATION FOR OPPORTUNITIES

Funds ■ Fund Managers ■ Investors ■ Deals ■ Performance ■ Service Providers

*June 2015 - June 2016**As of 14 July 2016


9


INSTITUTIONAL INVESTORS

While institutional investors still favour higher-risk strategies over lower-risk funds, there has been a shift in fund searches

issued since Q2 2016: investor interest in core and core-plus fund searches has increased, while fewer investors are targeting opportunistic and value added vehicles (Fig. 18). This shift could be a result of higher levels of dry powder being held for higher returning funds, which has contributed to rising asset valuations in recent times. Debt funds have grown in prominence over the course of the year as investors seek to further diversify their real estate portfolios.

Investors’ regional preferences have not shifted as significantly, however, with most investors still targeting North America-, Europe- and global-focused vehicles in the year ahead (Fig. 19). However, the proportion (27%) of investors targeting Asia-Pacific-

focused funds has increased by six percentage points since Q2 2016 – this could be the result of a rapidly growing real estate market in the region, as well as investors looking for attractive opportunities outside Europe and North America, where prime real estate is in increasingly short supply.

Q2 2017 has seen a rise in the proportion of fund searches issued for commitments of less than $50mn, from 37% in Q2 2016 to 45% (Fig. 20). However, there has been little variation in the number of funds targeted in the year ahead, as seen in Fig. 21.

40%

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Fig. 19: Regions Targeted by Private Real Estate Investors in the Next 12 Months, Q2 2016 vs. Q2 2017

44%

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Fig. 18: Strategies Targeted by Private Real Estate Investors in the Next 12 Months, Q2 2016 vs. Q2 2017

Strategy Targeted

37%45%

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Fig. 20: Amount of Capital Investors Plan to Commit to Private Real Estate Funds in the Next 12 Months, Q2 2016 vs. Q2 2017

25% 24%

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Fig. 21: Number of Private Real Estate Funds Investors Plan to Commit to in the Next 12 Months, Q2 2016 vs. Q2 2017


10


DRY POWDER

Private real estate dry powder levels continue to rise and remain above the end-of-year 2016 figure of $237bn, reaching

$246bn as at June 2017 (Fig. 22). This marks an increase of 81% from the $136bn held by private real estate funds in December 2012, which has contributed to the concern over rising valuations.

North America-focused funds continue to account for the majority (59%) of global dry powder, with $145bn as at June 2017, increasing from $133bn in December 2016 (Fig. 23). Dry powder levels across all other regions remain relatively static when compared with the end-of-year 2016 figures.

Opportunistic and value added funds remain the predominant strategies securing capital over time, and hence have the most dry powder to date ($102bn and $60bn respectively, Fig. 24). However, recent years have seen the emergence of real estate debt vehicles, for which dry powder levels rose from $13bn in December 2012 to $42bn in June 2017. Real estate debt witnessed the greatest increase in dry powder (+$7bn) of any strategy since the end of 2016.

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Fig. 24: Closed-End Private Real Estate Dry Powder by Strategy, 2008 - 2017

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202 195

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Fig. 22: Closed-End Private Real Estate Dry Powder, 2008 - 2017

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Fig. 23: Closed-End Private Real Estate Dry Powder by Fund Primary Geographic Focus, 2008 - 2017

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FUND PERFORMANCE

Rising valuations for property has helped push the net asset value (NAV) of closed-end private real estate funds up by 2.6%

in Q3 2016 (the most recent quarter of data available) marking its 26th consecutive quarterly increase (Fig. 25). This has contributed to the strong performance of the asset class over recent years, with private real estate funds generating an annualized return of 13.8% in the three years to September 2016 (Fig. 26).

The PrEQIn Real Estate Index stands at 106.3 index points as at September 2016 (rebased to 100 as of 31 December 2007), with all strategies rising between Q2 and Q3 2016 (Fig. 28). Despite a small decline from March to June 2016 (-0.6 points), the Real Estate Debt Index experienced the most growth (+3.2%) in the quarter and now stands at 126.0 points.

Fig. 29 shows that there is still significant value to be realized from older private real estate funds, indicating the potential for the high distributions seen in recent years to continue in the future.

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Median Net IRR

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Fig. 27: Median Net IRRs and Quartile Boundaries for Closed-End Private Real Estate Funds by Vintage Year

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Fig. 29: Closed-End Private Real Estate – Median Called-up, Distributed and Residual Value Ratios by Vintage Year

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80

100

120

140

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

PrEQIn Real Estate PrEQIn Real Estate DebtPrEQIn Opportunistic PrEQIn Value Added


Inde

x Re

turn

(R

ebas

ed to

100

as

of 3

1-D

ec-2

007)

Fig. 28: PrEQIn Real Estate Index by Strategy, 2007 - 2016

13.8%

16.0%14.3%

10.5%

0%

5%

10%

15%

20%

25%

3 Ye

ars

to M

ar-1

23

Year

s to

Jun-

123

Year

s to

Sep

-12

3 Ye

ars

to D

ec-1

23

Year

s to

Mar

-13

3 Ye

ars

to Ju

n-13

3 Ye

ars

to S

ep-1

33

Year

s to

Dec

-13

3 Ye

ars

to M

ar-1

43

Year

s to

Jun-

143

Year

s to

Sep

-14

3 Ye

ars

to D

ec-1

43

Year

s to

Mar

-15

3 Ye

ars

to Ju

n-15

3 Ye

ars

to S

ep-1

53

Year

s to

Dec

-15

3 Ye

ars

to M

ar-1

63

Year

s to

Jun-

163

Year

s to

Sep

-16

Real Estate Buyout Venture Capital Mezzanine


Thre

e-Ye

ar H

oriz

on IR

R

Fig. 26: Three-Year Rolling Horizon IRRs, 2012 - 2016

-0.4%

0.2%

4.0%

7.3%

4.5%

5.6%

1.5%

2.5%2.6%

2.3%1.9%

2.6%2.6%

1.7%

3.4%3.9%

1.3%

4.5%

1.9%

4.4%

2.4%2.3%

2.3%

3.8%

2.8%2.5%

2.6%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1 Q3

Q1

Q3

2010 2011 2012 2013 2014 2015 2016


Aver

age

Chan

ge in

NAV

from

Pre

viou

s Q

uart

er

Fig. 25: Closed-End Private Real Estate Quarterly Change in NAV, Q1 2010 - Q3 2016


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