Landmark’s change of tack is a shift for secondaries

A near 40% decline in deal value meant a different focus for the firm’s latest private real estate secondaries research, and gives sister publication PERE's editor Jonathan Brasse cause to think the sector is entering a pivotal period.

A near 40% decline in deal value meant a different focus for the firm’s latest private real estate secondaries research, and gives sister publication PERE’s editor Jonathan Brasse cause to think the sector is entering a pivotal period.

On Tuesday, Landmark Partners released its annual real estate transactions research. As usual, the rhetoric about the sector’s future prospects was upbeat.

But anyone familiar with the secondaries investment specialist’s research should have noticed a shift in emphasis. Rather than focus its headline comments on the value of deals transacted during the last 12 months, as prior reports have done, Landmark instead shone its spotlight on an increase in the number of deals to have transacted.

Had it retained a focus on total deal value, it would have led with a number reflecting an almost 40 percent decline from the year before. According to Landmark, $5 billion of private real estate secondaries traded, down on 2015’s $8.2 billion.

Having produced it for nigh-on 20 years, Landmark’s research is reputedly among the clearest in an opaque investing method for real estate investors and their managers. As such, in a week in which rival Partners Group and advisory firm Greenhill Cogent also released research on the space, it will be the Landmark numbers that are likely to resonate the most with onlookers.

Landmark blames a lack of $1 billion-plus portfolio sales for the shrunken volume, a factor Greenhill echoes, adding a flight to real estate from other asset classes has also contributed to a reticence to offload fund positions. For the record, Greenhill saw transactions decline in value from $7.5 billion in 2015 to $4 billion last year – different numbers to Landmark’s, but following the same trend.

As sister publication PERE declared in the leader of its Secondaries Report 2016, published in December, private real estate secondaries is approaching a pivotal time, precisely because of the lack of mega-sales. We wonder whether California Public Employees’ Retirement System’s $3 billion or Harvard’s attempted $1 billion offloads have lulled would-be buyers of secondaries stock into a false sense of security about future annual volume. Both institutions articulated how their sales were part of strategic reductions in manager relationships. Such reduction programmes surely are limited operations; once they are done, they are done.

So, if private real estate secondaries transaction volume is to resume the upward trajectory that we had become accustomed to, where will the replacement volume come from?

In PERE’s report, the sector’s managers and advisors alike, while aware of the limited number of such strategic exits, insisted future volume will emanate from a widening array of other opportunities. In this week’s slew of reports, they state the same message. Landmark highlights how “fund sponsors, funds of funds and other asset managers were the most active sellers” with manager-led transactions rocketing in value from $300 million in 2015 to $1.8 billion last year.

Partners sees that increase as pointing the way for future volume. “In our view, the biggest opportunity for buyers lies off the beaten track in non-traditional secondaries, for example, in secondary transactions originated by GPs,” it said in its research.

They might be right, but whether enough managers engage the secondaries market to replace the strategic sales by the world’s biggest institutions remains to be seen. In the near-term, there is a more pressing issue: will the record amounts of capital being targeted for the sector be satisfied?

Last month’s news that Carlyle-owned Metropolitan was targeting $1 billion for its latest secondaries fund – almost twice the amount raised last time – followed reports that Landmark is out seeking $2 billion and Partners is understood to want at least that for its latest effort. All of that, added to the $12 billion Greenhill says was raised by real estate secondaries funds in the last three years, suggests some pretty mighty dry powder around.

Interestingly, the Association for Investors in Non-listed Real Estate Vehicles said in December that 3 percent of total funds in the market typically traded via secondaries transactions on an annual basis. PERE’s first Friday Letter of the year forecast $91 billion of capital raised by closed-ended private real estate funds in 2017, a second year of decline from a cycle-high 2015. That would suggest $2.73 billion of private real estate secondaries deals in 2017. Even multiplying that number over the three-year investment periods typical of closed-end property funds and a perfect match is not assured.

That leads this Friday Letter to suggest, rather than a blip in an otherwise upward trajectory, Landmark and its peers may be prognosticating a little on the optimistic side.

How will your firm address the drop in volume? Let me know your thoughts: