Real estate investors find opportunities across the globe, fundraising is up and new sources of financing emerge. The real estate private equity industry is expected to be innovative in providing investors and fund managers with liquidity. As the industry is going through a phase of institutionalisation, processes are going to be formalised, noncore activities outsourced and proactive steps taken towards regulation, says Ernst & Young in their report “Trends in real estate private equity for 2016”.
The report expects a new environment for real estate managers with rising interest rates in the US and a slowdown of growth in China. In times of change for both, developing and emerging economies, EY sees not just risks but also opportunities for real estate investing. “The successful managers in today’s market will need to behave much more like stock pickers,” says the report.
EY expects that core strategies will continue to attract investments although they are already part of institutional allocations. Indeed, the report points out that 54 percent of investors will commit more money into private core real estate funds within the next year. For core real estate, the report sees decreasing yields due to higher prices for real estate. However, this also stabilised the demand for core real estate.
For secondaries, the EY report identifies an increasing shift towards liquid products as some large and successful fundraising could be observed during 2015. This segment remains a highly specialised segment requiring a deep understanding of an entire fund portfolio. However, with specialist funds growing in size and number, the ability for limited partners to achieve liquidity is increasing, while also providing investors with an attractive buying opportunity.
Although regulation is costly, EY identifies opportunities for asset managers. With AIFMD being implemented, the fundraising and managing of real estate funds may change. Regulation regarding risk management, valuation oversight and portfolio management may actually lead to enhanced competencies in risk management.
Besides, the implementation of AIFMD as a standard across Europe may lead to improved cost efficiency as only one framework has to be covered instead of a “patchwork of different regulations”. For large real estate managers, the report predicts efficiency gains while small ones, especially those just above the AIFMD threshold, may have to consolidate or work with third parties.
The report expects public-to-private activity in the real estate sector to continue due to rising levels of dry powder among real estate funds, some attractive pricing for the REIT sector and shareholder activism. REITs are in a good shape by now achieving lower risks and better yield and capitalisation due to the exploitations of public-to-private deals. Using those, REITs have managed to take advantage of a high level of available and lower-cost capital to refinance and clean up their balance sheets.
Finally, real estate fund providers deal with managing their business’ complexity. On the one hand, they raise larger funds and offer more strategies and products. On the other hand, reporting must be improved due to higher transparency demands from investors. “Outsourcing to fund administrators can provide clear benefits, such as a more flexible use of resources, an ability to focus on revenue and return-generating activities, a more scalable platform, assurance for investors that reporting is being managed by an independent third party and more predictable operating costs,” says EY.
EY expects a positive development of the real estate sector. On the macroeconomic level, stable inflationary policy continues to benefit asset prices while lower unemployment and relatively low commodity prices play another beneficial role. On the micro level, funds attract high levels of capital and are closed successfully.