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Strong Real Estate Fundraising Pushes Unspent Funds to a Record $294 Billion

Another $24 Billion Raised for Real Estate Deals
October 12, 2018
Investors say they plan to draw back from riskier fund types, said Tom Carr, Preqin’s head of real estate.

Private real estate fundraising pushed the amount of unspent money to another record, according to private equity data provider Preqin, as investors show signs of growing more wary of risk.

Fifty-three funds held a final closing in the third quarter, securing a total of $24 billion. Preqin expects these figures to rise as much as 10 percent when the final tally is wrapped up. This marks a slowdown from the second quarter when 74 funds secured $32 billion, but it is still in line with historical averages.

Preqin noted the proportion of funds that met or exceeded their initial target size spiked, indicating that those funds that close are holding successful fundraising processes. Seventy percent of funds closed year-to-date have met or exceeded their target size, including nearly one-fourth of them raising 25 percent or more than targeted.

As in the second quarter, private equity funds that target riskier property assets drove fundraising levels in the third quarter. However, investors surveyed by Preqin said they intend to draw back from these riskier fund types.

Only a fifth of those surveyed "feel that these funds present the best opportunities over the coming 12 months," Tom Carr, Preqin's head of real estate, said in a statement on the third-quarter data. "A year ago, almost half of investors surveyed were targeting opportunistic funds. If investors continue to move down the risk/return spectrum, core and core-plus fundraising might see more interest in upcoming quarters."

The flow of private money is leading to higher-than-expected sales volume for much of this year, particularly led by multifamily and industrial investment, according to Jones Lang LaSalle Capital Markets research. Competition for deals is strong and liquidity is high.

"Investors are displaying appetite for the commercial real estate sector," Sean Coghlan, JLL senior director of investor research, Americas, said in a statement. "Pockets of the market are seeing exceptional manifestations of liquidity with investors in pursuit of scale and market share."

A strong showing in the first half means transaction volume for 2018 is likely to be higher than many observers expected at the beginning of the year, Coghlan said.

Even though more money is flowing into real estate, it is becoming increasingly difficult to deploy capital in what has become a lower-yielding market overall, Coghlan added.

Funds raised but not yet invested in real estate assets are up significantly. So-called dry powder has risen to a new record of $294 billion as of the end of September. This is an increase from $282 billion at the end of 2017, according to Preqin data.

The largest fund closed in the third quarter was Carlyle Realty Partners VIII, which secured $5.5 billion.

At the start of October, there are 634 funds seeking a total of $219 billion. This is an increase from 624 funds that were seeking $203 billion at the start of July this year.

The largest fund on the road is Brookfield Strategic Real Estate Partners III. Managed by Toronto-based Brookfield Property Group, the property investment platform of Brookfield Asset Management, the vehicle is seeking $10 billion and had raised $9 billion as of last March. The fund is targeting direct property and equity positions in real estate companies on a global scale, with around half of its focus on the U.S.

Lone Star Fund XI is the second-largest private real estate fund on the road. Managed by Dallas-based Lone Star Funds, the vehicle has raised $2.9 billion from 73 investors on its way to a goal of $6 billion, according to regulatory filings. Fund XI intends to investment in non- and sub-performing single-family residential real estate debt, corporate debt and consumer debt. The fund will focus on opportunities in the U.S. and Europe.

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