An asset class of its own

A strong 2016 for real estate investment looks set to continue this year, as capital-rich investors flock to the strongest asset class around

Last year was a monumental one for global real estate, not least because the asset class was granted a new sector classification in the Global Industry Classification Standard (GICS), elevating real estate to stand alongside, rather than within, financials. This decision was taken because real estate has a unique risk-return profile that can now be backed by better performance attribution and analysis, making 2017 an enticing prospect.

As years go, 2016 was also strong for real estate in terms of deals and value. Private real estate funds generated an annualised 14.9 percent in returns in the three years to June 2016, “one of the highest returns of any private capital asset class”, wrote Andrew Moylan, head of real estate products at Preqin, in his foreword for the Preqin Global Real Estate Report 2017.

This strong performance is building confidence among investors, according to Moylan, as “93 percent of investors stated that real estate has met or exceeded their expectations in the past year, while over a three-year period 42 percent felt their expectations had been exceeded, more than any other alternative asset class.”

“Strong performance has also led to record distributions: $668 billion was returned to investors between January 2013 and June 2016 as managers have exited investments—this is over $200 billion more than was called up in the same period.”

There were some notable declines in 2016, with private real estate fundraising falling slightly to $108 billion from 2015’s $123 billion. This was attributed to the number of funds reaching a final close falling for four consecutive years, “as a few large players increasingly dominate the marketplace”, according to Moylan. Capital raising is also a long process, with an average of 18 months being spent on fundraising.

Chief among investors’ concerns was pricing. Despite having ample capital to spend, 53 percent of the investors Preqin spoke to said it is harder to find attractive assets today than it was 12 months ago.

Moylan explained: “As a result, some investors are reducing their outlay to real estate in the shorter term, with 24 percent stating they would invest less capital in 2017 than 2016. A similar proportion (25 percent) stated they would invest more in 2017, with the remainder investing at the same level as 2016.”

“This suggests we can expect 2017 fundraising to be on a par with the previous year, but significant growth seems unlikely.”

Financial snapshot

Blackstone, the largest real estate private equity firm in the world with $102 billion of assets under management, enjoyed a “strong finish to a turbulent year”, according to chair and CEO Stephen Schwarzman.

“Blackstone’s most recent results marked a strong finish to a turbulent year, as Q4 earnings nearly doubled versus the prior year period. Full year earnings rose significantly due to greater appreciation across the investment funds as well as strong growth in fee related income.”

“Our robust investment returns attracted best-in-class capital inflows, driving total assets under management to $367 billion, another record. And we continue to pay substantial distributions to our unitholders, delivering over $8 billion of value in the past three years, which is the highest of any public firm in our industry.”

Diving into Blackstone’s real estate results, the “scale and reach” of its global platform resulted in $17.6 billion of realisations, $12.6 billion capital invested or committed, and $15.2 billion capital raised in 2016.

These results were backed by realisations of $3.5 billion in Q4 2016, largely thanks to the public stock sales of Hilton and Hudson Pacific Properties. Blackstone also reported more than $5 billion of realisations closed or under contract and expected to close in early 2017.

Its total real estate assets under management and fee-earning assets under management were up 9 percent and 7 percent year-over-year to $102 billion and $72 billion, respectively.

Looking at a specific region, Europe has been particularly lucrative for €19.3 billion manager AEW Europe, the real estate platform of Natixis Asset Management.

AEW Europe completed €3.8 billion of transactions across Europe last year, of which €3.2bn were acquisitions, making 2016 the second most active year in the region in the firm’s history.

The firm raised €3.3 billion of additional capital in 2016 for European strategies, a significant increase on 2015 levels, of which broadly two thirds was for institutional funds, separate accounts and club deals, and one third was for retail funds.

The capital that AEW Europe raised across its institutional funds included €400 million for the pan-European logistics fund, LOGISTIS, as well as €400 million for SELF II, AEW Europe’s second European real estate debt fund in partnership with Natixis Asset Management.

Rob Wilkinson, CEO of AEW Europe, pointed to the merger with real estate fund manager CILOGER last year as important moment in 2016.

He said: “Following our record year in 2015, we continued to build momentum in 2016, which was another landmark year for AEW not least because of our merger with CILOGER.”

“We have further strengthened the business and, as we head into 2017, we continue to focus on our ambition of becoming one of the top five real estate investors and asset managers in Europe, while expanding and diversifying our investment platform to ensure stable and sustainable returns for our investor base throughout the cycle.”

Looking ahead

Commercial real estate investment activity looks likely to rebound in 2017, with global investment volumes projected to climb back toward $700 billion this year, according to analysis from JLL. This is up from $650 billion in 2016 and paves the way for a return to levels last recorded in 2014 and 2015.

Supporting this trend are increased institutional allocations directed toward commercial real estate, as they are focused on higher-yield opportunities, as well as new sources of capital that are being unlocked in countries such as China, Taiwan and Malaysia.

JLL global capital markets research director David Green-Morgan commented: “New capital targeting real estate is only part of the story; experienced real estate investors are also allocating more money to direct real estate opportunities. As these groups tend to be well-versed in allocating capital, they are able to direct large sums of money into the sector relatively quickly.”

Jeremy Kelly, director of global research at JLL, added: “Despite the fact that there are more cities than ever on investors’ radars, they continue to be overwhelmingly focused on the more transparent and liquid cities in the mature economies.”

“There are huge opportunities for emerging cities to capture a greater proportion of capital directed at real estate but, to do so, they will need to significantly improve transparency in order for investors to continue to gravitate toward the established investment market.”

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