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Investors Giving Private Equity Real Estate Funds a Second Look

Strong CRE Returns, Growing Supply of Assets Attracting More Dollars
February 20, 2013
There are strong signs that investor confidence in private real estate funds is returning, with 49% of investors making new commitments in 2012, and 53% planning to make new commitments to the asset class in 2013, according to the 2013 Preqin Investor Outlook: Real Estate.

Private equity funds, too, are seeing the surge.

“Our real estate businesses are growing significantly,” Jonathan Z. Cohen, CEO and president of Resource America reported this month. “In the first fiscal quarter alone [October - December 2012], our public and private REITs, Resource Capital Corp. and Resource Real Estate Opportunity REIT, collectively raised over $92 million in new equity capital. Resource Real Estate Opportunity REIT had a record quarter of fundraising, raising over $42 million of equity and acquiring nearly $29 million of real estate assets.”


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“Just to let you know, the trend has continued,” Cohen said. “We raised over $33 million of new equity capital for real estate products in January alone. We expect to set another high bar this quarter.”

The improvement in the performance of private real estate has encouraged some institutions to return to the asset class, while an increase in the rate of distributions from their existing commitments means that many investors also have more capital available to invest, according to Preqin, a leading source of data and intelligence on private equity investments.

Hamilton Evans James, president and COO of The Blackstone Group, said his firm is riding the wave of interest.

“Though the economy isn't all that strong, the lack of building in commercial real estate means that commercial real estate results are very strong,” James said. “Commercial real estate results are much stronger than the economy, if you will. So we're seeing stronger operating results in real estate than we are in our companies, which means that we're going to push those along further.”

While a large proportion of investors focused primarily on core investments following the downturn, many are now increasingly looking at investment options higher up the risk/return spectrum. Investor interest in core remained strong during 2012, but there was also increased appetite for core-plus, value added and opportunistic strategies, according to the Preqin report.

According Preqin, core is still a commonly sought strategy in the next 12 months, with 45% of investors targeting core real estate funds. This is only a slight decrease compared to the 47% of investors which were targeting this strategy in the 12 months following December 2011.

Perhaps most notable is the marked increase in the proportion of investors seeking distressed and debt vehicles over the past year. A significant 34% of investors were seeking vehicles following a debt strategy in the 12 months from December 2012, compared to just 8% in the 12 months from December 2011. Many investors have cited the opportunity to generate strong returns with a lower level of risk as one of the reasons for investing in funds following a debt strategy.

That is a trend that Oaktree Capital Group noted in its first quarter earnings. Oaktree’s real estate funds saw an aggregate gain of 19.1% before fees and 14.7% after.

“So far, we’ve raised about $430 million for our newest real estate fund, Real Estate Fund VI towards a capital target of at least $1.5 billion,” said John Frank, managing principal of Oaktree. “We regard the breadth and depth of stressed opportunities across the real estate sector and some of the most exciting opportunities we see for Oaktree. Our last two real estate funds have performed well to date and we continue to see a large opportunity set, with overleveraged properties from the last real estate cycle and commercial, residential and bank loan portfolios.”

Bill Sonneborn, CEO of KKR Financial Holdings, said his company expects to make an announcement in the next few weeks “of additional asset acquisitions targeting [real estate} that again can protect shareholders’ capital -- given acquisitions at well below replacement cost have an opportunity to provide yield and have upside depreciation particularly in an inflation area.”


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.


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