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Fundraising Slows Even as Investment Capital Continues to Flow into CRE in Quest of Increasingly Scarce Returns
By Mark Heschmeyer October 12, 2016
While global property investment is on the increase, private capital fundraising has slowed — reflecting widespread economic uncertainties. However, investment capital continues to flow into commercial real estate as investors scour markets for returns.
Global property investment has risen to $1.35 trillion in the past year across the globe, according to annual research out this past week from Cushman & Wakefield.
New York once again topped the ranking of cities from a total investment perspective. The U.S. also accounted for a larger share of the growth, with 15 of the top 25 cities on the list.
That shift to the U.S. has caused London to lose its global crown after Britains voted this past summer to leave the European Union (Brexit). The volume in the U.K.’s capital has fallen from $39 billion to $25 billion over the previous 12 months.
Meanwhile Cushman notes the world’s largest gateway cities increased their share of CRE investment, with the top 25 drawing in 53.3% of all global spending, up from 52.7% in the previous year. However, a range of gateway markets were down, including Tokyo, Washington, DC and Frankfurt, attributed to a combination of limited supply and local competition.
“We remain positive about investors’ interest in allocating capital to real estate,” said Carlo Barel di Sant’Albano, CEO, Global Capital Markets for Cushman & Wakefield. “Although volatility has declined over the past 12 months overall risks are still evident. While global uncertainty will continue to make investors more cautious, this is counterbalanced by the fact that corporate confidence has held up.”
Looking ahead, the scale of changes facing investors in the macro environment, from a slowdown in China, to Brexit, to potential interest rate hikes and the U.S. elections, has resulted in many investors struggling to decide where to look for value.
Allianz Real Estate, the real estate arm of the German insurer Allianz Group, is one such global investor shifting its location and asset mix strategy. Speaking last week at Expo Real in Munich, Allianz CEO Francois Trausch said his firm plans on expanding its U.S. holdings and making its first purchases in Asia. In Germany, by contrast, Trausch said competitive pressure is making investments difficult.
For now, Trausch is aiming to lower the office portion of the firm’s global portfolio from 65% to 45% and to concentrate more on retail and logistics (currently 25%). In the U.S., Trausch said Allianz favors trade and logistics projects, as well as student housing.
Scarcity of available product remains a factor in many markets as stakeholders keep an eye on interest-rate hikes and their potential effect on pricing.
Avison Young came to similar conclusions about global investment in its Fall 2016 North America, U.K. and Germany Commercial Real Estate Investment Review, also released this week.
“Irrespective of the ongoing conversation around potential interest-rate hikes and new geopolitical factors such as the Brexit fallout, abundant capital continues to seek the stability and returns that the commercial real estate sector still offers,” said Mark E. Rose, chairman and CEO of Avison Young.
“Historically low interest rates continue to fuel our industry. Simply put, if there were some adverse event that caused interest rates to move up, we would have a correction – and that’s not necessarily a bad thing,” says Rose. “But, at this point, we don’t expect to see rates move for a considerable period of time, thus keeping commercial real estate top-of-mind with many investors, compared with alternative investments.”
Rose noted increased investment in the U.S. may be held back by uncertainty surrounding the upcoming presidential election, but he expects this short-term hesitation to dissipate once the election is over.
The free-floating global uncertainty is also showing up in private capital fundraising, which declined in the third quarter, according to Preqin, a leading source of data and intelligence on the alternative assets industry, including real estate. Private real estate fundraising declined slightly in the third quarter with 32 vehicles securing $19 billion in investor capital.
Capital continued to be increasingly concentrated among fewer firms with the third quarter seeing the lowest number of funds to reach a final close since 2003.
Consistent with global investment trends, North America-focused funds again dominated the market, raising 81% of funds closed and securing 85% of global investor commitments.
“The $19 billion raised (in Q3 2016) is not far off recent quarters, and while fundraising this year has not quite reached the levels seen in 2015, there remains a great deal of institutional appetite for real estate,” said Andrew Moylan, head of real estate products for Preqin. “Moreover, the fundraising marketplace remains healthy; half of the 10 largest funds on the road have already held interim closes.”
The level of dry powder held by private equity real estate firms stands at $230 billion as at October 2016, up from $210 billion at the end of 2015 and from $156 billion four years ago.
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