Capital-Raising figures sink as the impact of COVID-19 takes its toll on key real estate assets.
Real estate capital raising was hit hard during Q3 2020 as the full effects of the COVID-19 pandemic began to materialize. This marks a significant shift in a short period of time: Q2 data was relatively positive – in terms of aggregate capital raised, if not the number of funds closed. Compared with last quarter, both the number of funds closed and total capital raised reduced sharply in Q3. Reflecting the market uncertainly, just $21bn was raised during the quarter, compared with $45bn in Q2.
Often a key driver of investor activity, the retail sector faces significant uncertainty as shopping habits evolve. And since COVID-19, online shopping has represented a larger share of total shopping baskets. The shift by retail real estate owners toward experiential shopping centers means nothing if footfall is a fraction of what it was just a year ago and rent collection is proving
difficult. With fewer people working in offices, too, demand for office assets could fall. That said, this could be coupled with the need for additional space to accommodate new working practices.
Still, in these circumstances there is likely to be less demand for space, if workers are in the office for up to 2-3 days per week. Preqin data shows investors favored the more established and liquid markets of North America and Europe during Q3. These regions accounted for 98% of all capital raised, up from 85% in Q2. Average fund sizes were 3x larger for those targeting North America ($1.25bn) than those targeting Europe ($393mn). Private real estate debt secured the most capital during Q3, boosted by the closure of a single large fund. While overall capital-raising numbers are down, many fund managers have been successful in attracting new capital. More than one in five (22%) funds closed by the end of Q3 managed to secure greater than 125% of its initial target.
Meanwhile, just 6% of funds secured less than 50% of their initial target. In such a tough fundraising market, it is taking longer to achieve those sums. During Q3, 24% of funds closed spent more than two years in market, as they sought to maximize the amount of capital secured. This compares with 16% of funds closed in 2019.
The number of funds in market across the real estate sector is continuing to increase, in spite of the present uncertainty. As of the start of Q4 2020, there are over 1,000 funds in market – more than twice the number in January 2016. With government bond yields either low or, in some cases, below zero, investors seeking income-generating assets continue to see value in real estate.
With funds in market targeting an aggregate $297bn, there is a relatively wide split between the strategies being targeted. Core investments (among the lower risk strategies) represent 12% of funds raising, and are targeting an almost equal 13% of capital. The relatively defensive real estate debt strategy is responsible for 13% of funds in market, yet 15% of aggregate target capital. This is a sign that many investors are seeking relatively secure income, without the volatility associated with direct investment. Debt also remains an attractive way to gain exposure to what could be a solid source of income, with some issuers benefiting from debt repricing as their core markets.