Nearly one in four real estate investment funds are involved in secondaries, according to research by the Association for Investors in Non-listed Real Estate Vehicles (INREV), which it says shows the practice has now become an established part of the real estate investment landscape.
In its report, The Secondary Trading and Liquidity Study, INREV has revealed that the total value of secondaries trades in the non-listed real estate funds market was worth around €9 billion in 2015. Between €2 billion and €4 billion of this total is estimated to have been traded in European funds.
The report suggested that the secondaries market will continue its upward trajectory because of an industry “rule of thumb”, which states that at least 3 percent of all capital raised in the real estate funds industry will be traded in the secondaries market over the next five years.
Of the €92.6 billion of capital that was raised for European non-listed funds from 2011 to 2016, at least €2.8 billion is likely to hit the secondaries market by 2021, INREV said.
“With a current value of €36 billion, private equity serves as a useful parallel for the possible growth potential of secondary trading in non-listed real estate,” said Henri Vuong, INREV’s director of research and market information.
“US public pension funds seem to have become more comfortable with the idea of secondary trading in general. This could have a significant impact on the volume, value and profile of the market. And, if private equity is a reliable indicator, secondary trading in non-listed real estate seems set to grow,” said Vuong.
Voung said the UK was the European hotbed of secondaries trading, adding that for closed-end funds, the bulk of interest is in single sector and value-add funds. For open-ended funds, the preference was for multi-sector and core funds.
For the period 2010 to 2015, almost 72 percent of all secondaries trades in closed-end funds and about 73 percent of all secondaries trades in open-end funds was accounted for by the top five funds in each category.
While activity levels on the markets vary, the average value of matched secondaries trades in UK open-end funds is around £540 million ($684 million; €642 million) per year.
“In general, transactions vary considerably in size. There is an active secondary trading market for retail investors in German open-end funds facilitated by the Hamburg Stock Exchange, where average trades reach about €0.3 million,” said Vuong. “Institutional investors will typically trade directly with one another at average values of approximately €5 million per trade. The largest single institutional secondary trade in 2015 hit a reported €2.8 billion,” she added.
INREV also reported that 55 percent of all trades in the period September 2009 to March 2016 were done at net asset value while 22 percent of all trades were concluded at a premium to NAV and 23 percent at a discount.
The average premium was 1.2 percent with a maximum of 20.5 percent, while the average discount to NAV was negative 2.6 percent, with a maximum of negative 55 percent.