Confidence soars for real estate as managers raise more than €150bn in fresh equity

By James Wallace - Thursday, April 12, 2018 16:18

Managers of the global non-listed real estate industry raised €152.3bn in fresh equity capital last year – up 25% on 2016, underscoring the enduring appeal of the real estate sector relative to other asset classes despite the late cycle phase in most targeted markets.

Investor confidence remains high in the asset class, with equity raised for 895 vehicles, up from 733 the previous year; and gains across all regions, according to the2018 Capital Raising Survey, jointly published today by INREV, ANREV and NCREIF coinciding with INREV’s annual conference in Dublin over the last two days.

Vehicles with a European strategy again led the way, with €67.2bn in capital raised, an increase from €56.6bn in 2016.  Of this total, European non-listed real estate funds enjoyed a record year, accounting for €35.1bn. 

Pension funds and insurance companies continued to be the main sources of new equity capital. Pension funds represented the lion share, 35.8%, followed by insurance companies, 13.2%. After which, capital sources strongly diversified between government institutions, sovereign wealth funds, charities, foundations, fund of funds and family offices.

“By any standards, a 25% uplift is very impressive,” said Lonneke Löwik​, INREV’s chief executive officer. “The survey tells a positive story about the continuing appeal of real estate for an increasingly broad spread of investors.  And the seemingly greater diversity of capital sources will no doubt be reassuring in terms of protecting the industry against any future systemic risk.”

Macro context

Crucial to the relative value of real estate is of course bond yields which will be influenced by the timing and pace of central banks normalising of monetary policy.  The probability that the Federal Reserve will tighten policy at a faster rate than investors are currently anticipating over the next year is becoming more widespread. In Europe, the ECB appears to be becoming more confident that inflation will rise, which would prompt a normalising monetary policy.

“We expect it to end its asset purchases in December. It then seems likely to proceed cautiously. We think that it will wait until September 2019 before raising interest rates, which seems to be later than investors currently expect,” wrote Capital Economics.

In the UK, Capital Economics expects interest rates to rise by more than markets expect. “Our long-held view is that the next hike in interest rates will come in May, and that the policy rate will end this year at 1.25% and next year at 1.75%.”

The predictions, if realised, could reduce the performance of real estate relative to fixed income, which, may influence future capital raising for the asset class.

Capital destination

For the third year running Europe topped the list as the investment destination of choice with 44.1%, or €67.2bn, of capital raised destined for this region. Next was North America claiming 28.8%, or €43.9bn, of capital raised followed by Asia Pacific with 16.4%, or €24.9bn.

The shares of capital raised for North American and global strategies have been gradually increasing year-on-year. The reverse is true of European strategies where its share has been gradually falling despite it being the most favourable investment destination.

Managers typically tend to raise capital for investment into their own regions: in Asia Pacific 85.5% of new capital raised was destined for investment into its home region; in Europe, the equivalent figure was 76.4%. However, North America-based managers bucked the trend with less than half, 46.5%, raising capital for investment into their own region.

Funds top the list as the vehicle of choice

Non-listed funds were the vehicle of choice for capital raising in 2017. Over half, 55.1%, of new equity raised was destined for funds. This proportion was much larger, 70.9%, when looking at capital raised for funds with an Asia Pacific strategy. The next largest proportion of capital raised, 20.7%, was for separate accounts investing directly.

A higher share, 28.5%, of capital raised for vehicles with a European strategy was destined for this vehicle type. Capital raising for vehicles with a global strategy show a different trend. Here most capital, 35.5%, was raised for funds of funds.

Big gains were made by vehicles with a global strategy, which made up over 10.4% of total capital – the equivalent of €15.8bn. This was most strikingly the case in North America, where over half of all capital is intended to be deployed outside the home region. Overall, North American vehicles gained significant ground this year, moving from €31.6 billion in 2016 to €43.9 billion; and vehicles in the Asia Pacific region increased the volume of capital raised from €21.7 billion to €24.9 billion.

Non-listed funds demonstrated an enduring appeal, with managers raising €83.9bn for these vehicles, reflecting the trend identified in the Investment Intentions Survey 2017

“Interestingly, the survey revealed a shift in the balance of capital sources with more corporations and non-traditional investors, including high net worth individuals and families, increasing their share of capital raised,” wrote INREV. “In turn, there was a proportional decrease in the percentage of capital coming from pension funds and insurance companies.  Together, these typically dominant sources of capital accounted for 49.0% of the total.”

INREV launches IRR index

INREV has launched a new IRR Index that will enable investors in European non-listed real estate to better compare their real estate investments with those they have in other asset classes.

The index will measure performance based on cash-on-cash returns as opposed to the value-to-value approach in the Modified Dietz method, which is the current default measurement for most real estate indices. 

It will be particularly relevant for closed-end funds, claims INREV, who added that the purpose of the index is to better align the real estate investment industry more closely with other asset classes. 

An initial consultation version of the index will be launched in May 2018.  All future editions of the index will be released quarterly, approximately three weeks after the INREV Quarterly Index.  

The new index benefits from earlier work to capture data from every single vehicle in the INREV Database.  This means the IRR Index could include performance data from a robust sample of 191 funds across vintages from pre-2002 to 2017.

Henri Vuong, INREV’s director of research and market information, said: “The launch of this index marks another important step forward on the journey to total transparency for the non-listed real estate industry.  It will complement other similar indices that already exist in the US and Asia, which could all potentially be combined to create a global index in the future.”

Management board reshuffle at INREV

James Raynor, CEO of Grosvenor Europe and Catriona Allen, senior fund manager at Aviva Investors have been appointed to INREV’s management board.

The two replace Udo Schaeffer of EON.AG; and Eric Adler, CEO of PGIM who are both stepping down from INREV’s board.

Raynor, who has been chair of the INREV Training and Education Committee for the past three years, will continue his support of INREV’s ambitions to improve knowledge-sharing and professional development.  He is chair of the INREV Fund Manager Advisory Council. He is also a board member of the Grosvenor and previously a senior director at Royal Bank of Scotland.

Allen has previously been co-chair of the INREV Performance Measurement Committee, who drive the creation of suitable indices for peer-to-peer and market comparison; and is currently a member of the INREV Investor Advisory Council.

James Wallace is a freelance consultant and can be reached via Linkedin or email:

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