In this second extract from The Secondaries Market, published in early December, James Sunday and Min Zhou of Landmark Partners look at who’s buying real estate secondaries, the geographic exposure of funds traded and the size and structure of transactions.
Click here to read part I.
Dedicated secondaries buyers are responsible for the majority of the transaction volume
As the real estate secondaries market has grown in size, depth and sophistication over the past four years, two key trends have emerged within the buyer universe:
- The market share held by dedicated secondaries buyers has steadily increased from 49 percent in 2012 to 85 percent in 2015. Landmark defines dedicated secondaries buyers as groups with pools of capital dedicated to secondaries transactions and are actively and regularly participating in the secondaries market. The increase in dedicated buyer market share was driven by the increase in large portfolio transactions, which needed experienced, well-capitalised buyers to lead and execute those.
- Within the dedicated buyers, the top three buyers in any year by market share has represented approximately 75 percent of total dedicated buyer dollar volume over the past four years. This highlights the fact that there has been a shortlist of well- capitalised dedicated buyers with substantial underwriting resources, that have been responsible for a significant component of total transaction volume by dollar value. This is anticipated to change over time as other well-capitalised buyers enter the marketplace in the future. At the smaller end of the spectrum, the number of buyers acquiring single fund positions and small portfolios has experienced some growth.
Geographic exposure of funds traded
US-focused funds accounted for roughly half of volume in 2015
Over time, Landmark has observed that the geographic breakdown of funds traded in the secondaries market has approximately mirrored capital commitments to new funds raised five to ten years prior. Capital raised by US-focused funds accounted for 51 percent of the total capital raised between 2004 and 2009, according to Preqin. US-focused funds accounted for approximately 47 percent of total secondaries market transaction volume, from 2012 to 2015 (see Figure 12.5).
While annual transaction volume of Europe-focused funds remained steady, at approximately $1.3 billion per year between 2012 and 2015, Figure 12.5 shows a noticeable drop in the region’s share of total volume in 2015. This was partially due to the fact that global-focused funds experienced the strongest growth in 2015, representing 20 percent of total volume, up from an average of 5 percent between 2012 and 2014. This was driven by a number of US pension portfolios traded last year having a high exposure to global opportunity funds.
Transaction size and structure
The growth of large transactions and structured transactions signals market depth
As Figure 12.6 shows, since 2012, there has been a significant increase in the number of ‘large’ secondaries transactions, which Landmark defines as transactions of at least $200 million of NAV. In 2015, eight large transactions closed, which is a four-fold increase from 2012 and a two-fold increase from 2014. These large transactions highlight sellers’ increasing comfort with completing large, broad-based portfolio transactions in the secondaries market and buyers’ ability to structure and execute these transactions. Overall, transactions greater than $200 million in size represented 72 percent of total volume in 2015, up from only 29 percent in 2012 and an average of 30 percent from 2012 to 2014.
Deal structures such as deferred payment transactions are being utilised more often in the real estate secondaries market, especially for larger transactions. In a deferred payment structure, the purchase price is paid over time (instead of at the time of closing).
Figure 12.7 shows that in 2012 only one of the 49 recorded transactions involved some type of structure, but this number has grown every year to nine in 2015. As for dollar volume, structured transactions averaged less than 25 percent of total transaction volume between 2012 and 2014, but grew to 57 percent in 2015. This was driven, in part, by a few larger portfolio transactions that utilised deferred payment structures to improve pricing optics for the sellers. In 2015, the average transaction size for all transactions was approximately $90 million, but the average transaction size for the nine structured transactions was $514 million, which highlights the increasing desire of sellers of large portfolios to manage pricing optics.
In summary, between 2012 and 2015 there has been broad-based growth of the real estate secondaries market and an increasing number of large-scale transactions, some of which have utilised structure. Secondaries buyers that had the resources, capital and experience to lead and structure larger portfolio transactions have been able to expand their market share. Successful execution of a few high-profile transactions has been a catalyst for other potential sellers to manage their portfolios in the secondaries market. The positive dynamics among these trends continue to contribute to the growth of the real estate secondaries market.
Watch out for our third part of this book chapter, where Sunday and Zhou discuss pricing and the market outlook.