New real estate fund managers are finding it difficult to close funds, perhaps reflecting a general mood of caution and transaction slowdown in the market. A new report from London-based research firm Preqin found that institutional investors continue to limit the number of fund managers they use, and when deciding on which managers make the cut, they are most likely to go with firms with longer track records and extensive experience.
In fact, 2016 marked the lowest fundraising total, at $11 billion, for emerging real estate fund managers (those raising their first or second fund, in Preqin’s definition) since the depth of the financial crisis in 2009. Last year also marked a significant decline in the number of funds run by these firms, at 72 vs. 100 or more in the years between 2010 through 2015. That’s because the share of institutional investors who are willing to put their money into a fund run by emerging managers has shrunk from 72 percent in 2009 to 36 percent in 2017.
The most likely group of investors to go with emerging real estate fund managers are pension funds, which might be willing to give new managers a chance in order to hit their targeted returns in a market with fewer attractive investment opportunities, according to Preqin research. From 2004 through 2014, emerging real estate fund managers delivered returns that were 0.7 percent higher than those generated by established fund managers.
Still, emerging fund managers are spending more time trying to close funds in 2017 than their more established peers, Preqin found. Fifty two percent of the new managers have had to spend from seven to 18 months on the road to raise the necessary capital, vs. 42 percent of established managers. Twenty nine percent spent more than two years raising funds vs. 22 percent of established managers who have had to spend that much time on the road.
Year-to-date in 2017, emerging fund managers raised just $2 billion through eight funds. The peak for this segment of the market happened in 2007, when 162 funds raised $30 billion.
Emerging real estate fund managers now also make up a smaller share of the overall fundraising market, accounting for just 10 percent of closed funds in 2016, vs. 41 percent in 2011.
The challenges facing new real estate fund managers coincide with a slowdown in the investment sales market. After reporting significant declines in transaction volumes in the first quarter of 2017, Real Capital Analytics (RCA), a New York City-based research firm, just announced that April marked a decline in deal volume that was in the high double digits. The slowdown affected all property types, the firm noted. (RCA did not yet provide specific deal figures, but will publish the final version of its report next week).