Real estate secondaries volumes dip in H1 2019 – Setter

Deal volume in the asset class fell almost 40% during the period – a dip which is expected to be temporary.

Real estate secondaries volume fell almost 40 percent year-on-year – a decrease in investment which is not expected to be the start of a long-term trend.

During the first half of this year, real estate secondaries transactions amounted to $1.9 billion compared with approximately $3.13 billion the year before, according to intermediary Setter Capital’s mid year report. The 39.2 percent year-on-year drop does not necessarily indicate that real estate secondaries transactions will start decreasing long term.

Setter Capital vice-president Mike Evans believes the drop in transaction volume is due to how real estate secondaries fundraising and investment activity has been concentrated among the largest industry participants. While overall volume has fallen, the number of real estate transactions over the past couple years has still been increasing, with Evans expecting trading volume in the space to increase during the second quarter.

A shift towards more GP-led transactions during the first half of the year may have also contributed to the dip, he added. GP-led transactions take longer to conclude and should be reflected in volume numbers for the second half of the year, Evans said.

There is also a slowdown in the trading of pre-crisis 2007 vintage real estate funds, which are reaching the tail-end of their lives, he added. The phase-out of these funds along with a shift in focus towards newer, higher quality funds likely led to a decrease in trading volume.

The real estate secondaries market has been much smaller and more segmented than the private equity secondaries market, according to Evans. With fewer participants, the market is less efficient and while on a growth trajectory, can be somewhat inconsistent.

The private equity secondaries market reported $42.1 billion in transaction volume during the first half of 2019, dwarfing the $1.91 billion for real estate. Still, real estate secondaries volumes were larger than that of other asset classes, including the $1.51 billion for infrastructure secondaries funds, $160 million for agriculture and timber secondaries funds and $340 million for hedge funds secondaries.

The target internal rates of return for real estate secondaries buyers was 14.3 percent, according to Setter’s survey.

Opportunistic real estate funds accounted for $500 million in purchases or 46 percent of the real estate funds transacted in the first half of the year. Core real estate funds accounted for 29 percent or $310 million of real estate funds purchased, while value-add funds comprised 25 percent of fund purchases, amounting to $260 million.