Entering the buoyant world of real estate secondaries

Fabian Neuenschwander, senior vice-president at Partners Group, says that although some private equity groups with large secondaries capability may enter the real estate secondaries market, the supply/demand imbalance is likely to remain for some time.

How do you view the real estate secondaries market so far this year?

It’s a very vibrant market. This year we’ve seen a significant increase in deal flow and in transaction activity. We’ll have a record year in terms of volume. That’s a combination of the market getting more established, pricing improving and new investors using this space.

What does the seller universe look like?

It’s broadening. For some time, pension funds have been active sellers, but now we’re seeing more sovereign wealth funds too. Financial institutions are also still active. You can’t really say there’s a broad trend.

Why do you think some sellers only end up selling a portion of a portfolio they put on the block?

Historically, you’ve always seen groups putting big portfolios to market and selling only parts of them. You need to really understand where an investor comes from and their objective. I think some of these groups have very large portfolios and the quality varies quite a bit. There’s only so much discount sellers are willing to take. If they don’t get the desired pricing, they’re not going to take it.

If you look at dedicated real estate secondaries funds, they are only between five and 10 big players, compared to private equity where you have some 30 groups. In real estate, the demand and supply imbalance is significantly wider. It will remain the case for a while. You’ll see other players move in but it won’t happen overnight.

Part of the reason is that the GP landscape is completely different to private equity. It’s a completely different asset class. Real estate secondaries is a relatively young business. Eventually, some big private equity groups will build capacity too.

How would you compare deal flow in Europe and in the US?

The quantity of deal flow is not so different in the US compared with Europe, but at the moment, we are seeing better opportunities in Europe than the US overall, especially in the UK and Scandinavia. We have a good footprint in Asia too, so we consider a global opportunity set, but we are currently slightly more active in Europe. I think it’s a function of how the market is in the US where things are very positive, because fundamental outlooks flow into pricing expectations. In Europe, the market is still a bit more opaque, which makes it relatively more attractive for a secondaries investor. There’s also less competition in Europe.

Have you seen an increase in GP-led restructurings in the real estate space?

Certainly. There’s a number of old funds out there that are coming to the end of their life. These funds were typically raised prior to the global financial crisis and have recovering assets. The focus isn’t on distressed assets but more on assets that haven’t fully stabilised yet and still have value-creation potential ahead of them. If the GP is going through an extension for two or three years, we come up with a solution for these types of situations. They could include a tender offer for the limited partners or a spin-off of existing assets. The number of these types of opportunities we see coming into the market has increased globally.