CRE Fundraising Drops to Five-Year Low
With interest rates expected to stay elevated, real estate investors are likely to remain cautious in their fundraising.
Talk of a soft landing and the expectation that the Fed would begin lowering interest rates as early as March dominated headlines in the first quarter this year. Real estate investors, however, were not buying it.
Preqin reports that aggregate capital raised declined from $30.8bn in the first quarter compared to previous quarter’s $28.5bn in the same period – a move supported by several mega-fund closures.
The biggest was Alterra Mountain Company, a single-asset continuation vehicle managed by KSL Capital Partners and targeting ski resort investments in the US.
It closed in January 2024 at $3bn, making it the largest continuation fund for real estate in the last five years, according to Preqin data.
The number of real estate funds closed almost halved from Q4 2023 to Q1 2024, from 116 to 59, according to Preqin.
For the second quarter in a row, value-add strategy was preferred, garnering $13.3 billion in investments.
According to Prequin’s 2024 Real Estate Global Report, the asset-holding period for core is around five to seven years, “which is ample time for current high interest rates to normalize, in turn allowing existing property values to recover and achieve strong performance,” it said.
“This could become the catalyst for core strategy to make a comeback in the near term.” Meanwhile, the time has come for real estate debt, which is poised to grow in prominence and cater to borrowers seeking refinancing in the coming months, according to Prequin.
Q1 was nearly the lowest fundraising period in five years, but it declined by only 7.4% – a 17.6% improvement year-over-year.
Q1 2024 saw $1.7bn raised across four funds. Investor interest remains strong, considering the high proportion of debt interim fund closures of 21% or $3.9bn of total interim closures.
“With interest rates expected to stay elevated and as the probability of an imminent cut fades, real estate investors are likely to remain cautious in their fundraising,” Gerard Minjoot, Analyst, Research Insights, at Preqin said in prepared remarks.
“Dry powder certainly took a hit, declining from $451.9bn at the end of 2022 to $387.4bn as of December 2023 according to the latest data. Nonetheless, this will provide an adequate cushion for fund managers if fundraising remains muted in the short term, without impacting deal-making activity.”