It is not easy to assess the size of the emerging private real estate secondaries market, mostly because it can be defined in (at least) two different ways.
For CBRE, secondaries transaction volumes in 2014 reached close to $8 billion globally, one of the highest readings of the sector. But then CBRE takes into account all real estate strategies, including core. Core funds typically invest in stable multi-tenant properties that provide low risk but also lower returns. Traditional real estate secondaries buyers, on the other hand, focus on higher return strategies.
“Generally speaking, I think it’s fair to say that in our numbers, there’s a lot of core business that takes place and those are not included in the numbers that opportunity and value-add secondary players would necessarily look at,” says Philip Barker, senior managing director of investment banking at CBRE Capital Advisors. CBRE’s real estate secondaries team facilitated the transfer of many core fund stakes in the UK and in Europe, and has now expanded in the US.
James Sunday, a partner with Landmark Partners, agrees that it is fair to segment the real estate secondaries market in two due to the frequency with which these core positions trade, especially in Europe. As a traditional secondaries buyer, however, Landmark typically excludes core. Accordingly, the firm tracked $4.8 billion globally in completed secondaries transactions in 2014.
“It is a very liquid market and it almost acts like a publicly-traded real estate investment trust market,” Sunday said of the transfer of core fund stakes in Europe. “What we’re focusing on is the opportunity set that traditional secondaries buyers are going to look at. That typically involves core-plus, value-added and opportunistic strategies.”
Regardless of how transaction volumes are tallied, Sunday and Barker agree that real estate secondaries is an expanding market and that transaction figures will be higher for 2015. Indeed, Landmark suggests volume this year could exceed $7 billion, and aggregate volume over the next 3 years could reach $20 billion to $25 billion or more. Meanwhile, given its wider net, CBRE reckons that there will be at least $10 billion in volume this year.
According to Landmark, growth of the secondaries market is based on the net asset value (NAV) currently held across the real estate universe. Every year, a small percentage of this NAV trades. The long-term average ‘turnover rate’ has averaged around 0.6 percent compared to 1.5 percent in private equity but has been increasing in recent years as more real estate LPs have been embracing the secondaries market to manage their portfolios. The real estate turnover rate hit 1 percent in 2014, according to Landmark calculations.
“Over the past six years, real estate secondary transaction volume has been growing at over 30 percent per year and we expect this robust growth to continue over the next few years,” said Sunday.
This article is an excerpt from PERE Secondaries Report 2015, which was published in December and is a supplement to Secondaries Investor’s sister publication PERE.