January 8, 2019

At 10 years and counting, global real estate markets remain in the late cycle phase, but projected investor target allocations suggest there is more growth to come in 2019 – for some at least.

The withdrawal of quantitative easing (and the resulting reduction in liquidity), along with rising inflation and interest rates, heightened political uncertainties and international trade tensions are together weighing on global economic growth prospects. Equity and bond markets are bearing the brunt, with heightened volatility expected to be a feature of the year ahead.

Real estate markets are feeling the benefit, says Gianluca Romano, JLL’s Global Head of Underwriting and Advisory.

“Drawn by attractive yields and stable, long-term revenue streams, weighted average target allocations to real estate in institutional portfolios are up approximately 150 bps over the past five years, from 8.9 percent in 2013 to 10.4 percent in 2018 according to a recent survey.”

But while the indications are that 2019 will be a record year for fundraising, capital flows will be further skewed towards a select few investment managers.

In 2017, the largest 10 and 20 funds that closed made up 29 percent and 42 percent respectively of the capital raised during the year. Initial data indicates the figures will be even higher in 2018. With two-thirds of institutional investors keen either to maintain or reduce the number of third-party investment managers they use, the trend of the “big getting bigger” seems set to continue.

To deploy capital efficiently though, these mega funds will have to consider an expanding range of transactions – including single assets, portfolio deals, platform deals, roll-ups, operating partnerships and large urban regeneration projects, says Romano.

By contrast, smaller investment managers face a harsher fundraising climate. Only 12 percent of the closed-end real estate funds launched in 2017 held a final close, compared to 66 percent in 2015. And Preqin data indicates the number of managers able to reach a final close in 2018 will be 50 percent lower than the previous year.

“Consolidation has been one notable response. There was significant M&A involving smaller and mid-sized investment managers in 2018, and we expect further activity in the coming year,” says Romano.

Asia beckons for investors

North America has long been the most popular destination for institutional investor capital, especially among American and Asian investors. However, recent interest rate increases in the United States – and the prospect of more to come – have deterred some investors from expanding rapidly in the country, prompting a potential reallocation of capital towards Asia Pacific markets.

“Transaction volumes in the APAC region were up 20 percent year-on-year to Q3 2018, with full year volumes expected to set another record,” says Romano. “The growth momentum will likely slow in 2019, but we still forecast an approximately 5 percent rise in overall transaction volumes in the region.”

Click to read about why real estate fund manager fees models are under scrutiny.


Gianluca Romano

Global head of indirect capital research at JLL

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