October 10, 2017

Global real estate funds’ dry powder of unspent capital reached a record US$255 billion as of July 30. That’s up from US$237 billion at the end of 2016, and US$136 billion in December 2012, according to alternative assets data provider Preqin .

Preqin also found that 68 percent of the managers it surveyed in June indicated real estate is more expensive than it was 12 months ago. As a result, three-quarters of surveyed fund managers say it is more difficult to find attractive investment opportunities compared to the previous year. More than a third of firms are seeking to review a greater number of opportunities than they did a year ago, while 42 percent are lowering the return targets of their funds (a figure that rises to 55 percent for the largest firms with US$5 billion or more in assets under management).

A crowded market
In part, the large and growing cash piles reflect the fact that institutional investors have been allocating more money to real estate, notes David Green-Morgan, Global Capital Markets Research Director with JLL.

“Although a growing number of institutional groups are investing in real estate directly, real estate managers have also benefitted from this allocation trend.”

At the same time, opportunities for real estate managers to invest have become increasingly constrained. A lack of available product is not so much the problem, with Preqin reporting that 887 private equity real estate transactions worth US$63 billion were completed in Q2. Rather, competition for each asset has become so intense that more traditional real estate managers are missing out more often.

“In terms of transactions, we are almost back to the heights of 2006 and 2007, so investment activity is at elevated levels,” says Green-Morgan. “However, the number of participants has increased, which is putting pressure on some traditional investors. In response, many groups have halted new inflows, given how much money they already have unspent.”

Spreading the investment net
The combination of intensifying competition for real estate assets and managers’ burgeoning cash piles is forcing market participants to become more imaginative in their investment strategies, especially considering how far along we are in the cycle. That means looking beyond prime assets in gateway markets to potentially diversify into higher-risk product types and locations.

“In particular, those firms touting enhanced returns really need to look across the full spectrum of opportunities if they are to meet their promises,” says Green-Morgan.

So where are the best investment prospects at present? For Green-Morgan, the logistics sector continues to offer good opportunities, although the weight of capital remains intense.

Logistics remain slightly higher yielding than the office and retail sectors,” he notes. “Within that space, we see the most attractive opportunities in the developed markets of the United States, Europe, Japan and Australia at the moment.” Portfolios – which given their size and the number of assets involved will include a range of prime and secondary assets – are a particular draw, he adds.

Click heref to read more about cross-border capital flows into real estate


David Green-Morgan

Global Capital Markets Research Director, JLL

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