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Private Equity Real Estate Funds to Target Alternative Assets, Debt in 2017

Private equity investors will have close to a record level of capital at their disposal in 2017, with an aggregate amount of $237 billion raised for investment in commercial real estate globally, according to London-based research firm Preqin.

The figure is just shy of the post-financial-crisis high of $241 billion spent by private equity real estate fund managers globally in acquiring assets in 2015, according to Andy Moylan, head of real estate products at Preqin. But it’s above the 2016 total of $202 billion in investments. 

Fundraising levels were lower, as fund managers garnered $123 billion in 2015 and $108 billion in 2016, according to Preqin figures.

The 2016 dip has largely been attributed to uncertainty surrounding economic troubles in China, the Brexit vote and the U.S. presidential election, Moylan notes.

At the current stage in the U.S. real estate cycle, it’s becoming tough to find value, Moylan adds, so private equity investors may be more likely to target value-add and opportunistic assets, a point also recently made by Senior Vice President of research firm Real Capital Analytics (RCA) Jim Costello.

U.S. real estate is becoming more expensive, but private equity investors still see U.S. assets as attractive, Moylan notes.

Speaking from the IMN’s Winter Real Estate Opportunity & Private Fund Investing Conference in Laguna Beach, California, panelist Rene Circ, director of research for CoStar Strategy, called the attitude on the event floor “positive.”

The mood amongst the private equity industry is one of “cautious optimism,” according to Circ, marked by a feeling the current cycle may be getting too long and a close monitoring of interest rates. That being said, “capital keeps flowing.” The biggest problem is deploying it and finding attractive deals, he notes. "Most people feel that the apartment sector has gotten ahead of overheated and capital will cycle a bit away from super core [assets]," Circ says.

With few high-yielding investment alternatives, private equity capital will keep flowing into commercial real estate, Circ adds.

That jives with Preqin’s upcoming 2017 Preqin Global Real Estate Report, which found that 25 percent of investors will commit more capital to private real estate funds in the 12 months following December 2016. Last year, only 18 percent of investors felt that way.

Year-to-date in 2017, there have already been 164 private equity-backed real estate deals for an aggregate value of $9.3 billion globally, according to Preqin.

Rising interest rates could narrow the gap between yields on core real estate assets and fixed income investment opportunities, making core less attractive, says Circ. Debt funds will also remain attractive, following on a strong interest by private equity funds in this type of investment vehicle in 2016, he adds.

As a result of higher interest rates, private equity investors are expected to venture further into “niche” or alternative assets, according to Moylan, who says “we will see more of niche giving competition to main asset types.” Private equity investors made a “huge jump” in activity in the  student housing sector in 2016 compared to 2015, he notes as an example.

Meanwhile, private equity is still busy fundraising. Blackstone, for instance, has just announced it will raise $5 billion for its first core private equity buyout fund, Bloomberg reports.

Also noteworthy of late has been The Carlyle Group, which appears to be on a fundraising and acquisition spree.

“I think we will see a few more megafunds this year,” Moylan says. “We still see a lot of money flowing to the big guys,” he adds, citing activity from Blackstone and Starwood.

In early January, Bloomberg reported The Carlyle Group was prepping its eighth real estate fund valued at $5 billion. In 2015, the firm raised $4.2 billion for its seventh real estate fund targeting “opportunistic strategy.”

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