Private Equity RE Eyes Value for Money

Preqin’s US headquarters at One Grand Central Place in Midtown Manhattan. (Photo courtesy of Goldman Copeland)

NEW YORK CITY—Private equity real estate executives find it increasingly difficult to find value for money, Preqin said Wednesday. Accordingly, they’re recalibrating their investment strategies this year; this means a shift to smaller assets, among other things. Sixty-seven percent of real estate managers surveyed by Preqin said it’s harder than it was a year ago to find attractive assets, with over half saying they consider this their biggest challenge at present. These findings by the New York City- and London-based research firm occur against a backdrop of record levels of dry powder for real estate investments: a global total of $236 billion as of this month. The all-time high cache of dry powder is “driven by strong fundraising as a result of considerable institutional demand for real estate exposure,” according to a Preqin report. Meanwhile, fund managers are also facing more competition from institutional investors committing capital directly. “This ‘wall of capital’ is pushing up the price of real estate assets and making it increasingly difficult to find value in the market,” says Preqin. “In this environment, it has become harder to deploy capital raised from investors, with the ratio of year-end dry powder levels to total capital called in the previous year rising for three consecutive years.” To get that capital out the door, PE investors are thinking small while also thinking big. Twenty-six percent of all deals completed year-to-date have involved smaller properties, up four percentage points from the year-ago period. Up even more sharply is the proportion of portfolio transactions: 22% of all deals completed YTD, compared to just 12% of transactions in the first six months of 2015. In a search for value, fund managers are also thinking outside the box a little more often. Niche property sectors such as seniors housing and student housing may account for just 3% of all YTD deals, but that’s a 300% increase over the year-ago period. Meanwhile, PE investors are making fewer office deals this year, and more acquisitions of mixed-use properties. Domestically, the two biggest states for private equity investment into real estate are New York and California. The Empire State represents just 11% of North American PE deals, but 27% of the value. The Golden State, conversely, represents 21% of North American deal flow but only 13% of deal value. Responding to current market challenges, “fund managers are implementing increasingly flexible investment strategies, and relying on their expertise and contacts to find good value assets that might be overlooked by other buyers,” says Andrew Moylan, head of real estate products at Preqin. “This has resulted in a trend away from larger acquisitions and towards more complex portfolio transactions or smaller assets. It remains to be seen if these acquisitions will generate the same strong returns which have made the asset class so attractive to investors in recent years.”