NEW YORK CITY-Private equity fund managers are increasingly facing illiquidity within the capital markets, leaving few able to secure bank financing for commercial real estate projects, according to "Global Market Outlook: Trends In Real Estate Private Equity," a new report by Ernst & Young.
The report -- based on a survey of 300 global real estate funds -- shows that deployment of capital by private equity funds has slowed down largely because of the Eurozone crisis and the uncertainty it has brought to markets around the world, including emerging economies like Brazil and India. However, the one exception is Russia, where domestic banks continue to fund transactions and new development despite their already high exposure to real estate, providing local investors with the means to execute transactions, says E&Y.
"The still tough global financing market has had a dampening effect on real estate funds but there have been other challenges too, most notably in the significant structural and cultural changes funds are having to navigate coming out of the recession,” says Mark Grinis, global real estate fund practice leader at E&Y.
When asking about the challenges for managers to get a new fund to its first close, 52% responded that investors required greater due diligence before committing to the fund, 54% ofrespondents also cited agreement on deal terms and fees as the biggest stumbling block. According to Grinis, although these challenges have caused short term pain for many fund managers, the outlook for most from this structural change is a much more efficient, transparent and scalable platform from which to build future growth.
"This is a period during which creative investors can thrive,” Grinis says. "Real estate fund managers that can successfully navigate the current changes, including demands from investors for greater transparency and lower fees, and who can devise and offer creative niche solutions for investors moving forward will have a key differentiator in the next phase of market growth," he adds.
The report also highlights the emergence in the US market of funds created to take advantage of investment opportunities in the single-family residential market, and the growing appeal of senior debt funds. According to E&Y, senior debt funds are particularly showing appeal in markets like China, where banks are more limited by regulation than liquidity, and Europe where there is a need for alternative financing.
At the same time, optimisim remains. When asked if their next fund would raise more, the same or less capital than the last, an overwhelming majority -- more than 71% -- predicted raising about the same or more with less than 29% expecting to raise less than the prior fund.
[To download the report, click here.]
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