Bid-ask gaps and co-investment trends are among the reasons it’s hard to predict how much activity there will be in real estate secondaries this year. But signs are pointing to another record-breaker.
Real estate secondaries had a huge year in 2015 with a 71 percent rise in deal volume year on year, according to a report by secondaries firm Landmark Partners. With around $8.2 billion traded – a total boosted by Strategic Partners’ record-breaking $3 billion portfolio purchase from the California Public Employees’ Retirement System (CalPERS) – all eyes are fixed on the year ahead.
“The fact that a number of large-scale deals closed last year is the tip of the iceberg,” Jamie Sunday, a partner in Landmark’s real estate group, told me. “The fact you’ve seen a number of larger deals successfully executed has now given comfort to a whole host of other large-scale LPs who would like to manage their large portfolios.”
This year, around $9.4 billion in real estate secondaries is expected to change hands, according to a survey of sellers by broker Setter Capital. Market sources I spoke to generally agreed 2016 could be a bigger year than 2015, referencing a few large deals currently being shopped around, but stressed potential dealflow versus closeable dealflow can be two very different things.
The principal reason is that you never know which assets will end up selling. For example, only about half of Harvard Management Company’s $1 billion portfolio sale ended up trading hands last year, mainly because pricing couldn’t be agreed on the rest of it, according to sources. The Government of Singapore Investment Corporation (GIC) is rumoured to have only sold a fraction of a $1 billion portfolio it brought to market last year for similar reasons.
On the flipside, demand is hard to put a finger on too. Despite investment bank Evercore’s estimates of around $7.2 billion in dry powder for real estate secondaries, there’s not necessarily pressure for all of that to be deployed in the short term, particularly for funds that invest only a portion of their capital opportunistically in real estate.
Demand is also hard to predict because of co-investment capital: this isn’t taken into account when looking at funds in market or dry powder, and yet it plays a crucial role in deals. Just look at the CalPERS sale, where Strategic Partners closed the transaction with around 10 co-investors providing capital for the deal.
While it may be hard to pinpoint the exact levels of demand and supply, there’s no denying a surge in momentum. We’ve already seen a couple of notable deals this year, like Partners Group’s purchase of a €450 million Nordic portfolio from a unit of Brunswick Real Estate. And there have been a number of dedicated fund closes already this year – over $1 billion has been raised between Metropolitan Real Estate’s latest vehicle and the Townsend Group’s latest fund of funds – while groups like HQ Capital and Ardian are expected to expand their sights to real estate.
“The real estate secondaries market has continued to grow over the last several years,” the manager of a global investment firm told me. “More and more people are taking a hard look at it.”
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