Market sentiment is improving but fundraising remains slow. Growing competition in the core space means managers need to find creative solutions to meet demand. Richard Lowe reports
It has undoubtedly been a challenging 18 months for real estate fund managers seeking to raise new capital. Latest figures from INREV show that capital raising in 2009 was down by 60%, but they also confirm that some investors - albeit a minority - have been willing to step off from the sidelines and commit new money. But when they have committed it to new capital it has been almost exclusively for core strategies with low gearing in developed markets, particularly the UK, Germany and France.
This trend seems to have been maintained during the first few months of 2010. A typical example was Legal & General Property's (LGP) new UK Property Income Fund, which raised £175m (€200m) from European institutional investors, although this particular vehicle actually raises a number of interesting themes. One of its big selling points was its variable gearing: investors could choose between ungeared returns forecast in the region of 10% or a leveraged exposure with correspondingly higher return expectations, closer to 15%. This feature was designed to attract as wide a range of investors as possible, recognising that many today have a lower appetite for gearing in funds.
But just as significant as its approach to leverage were the types of real estate assets on its acquisition radar. LGP said the fund would target buildings across the office, retail and industrial sectors, but most importantly it would focus on those worth between £50m and £100m. These sorts of assets fall firmly within the ‘large' lot size category and such a strategy requires a significant volume of capital, which is why LGP is hoping to eventually raise £1bn (gross asset value). Assets within this size range consequently attract less investor interest than sub-£50m assets, something LGP is seeking to capitalise on in an increasingly competitive UK market.
The alternative response to the growing competition in the UK has been to look at the other end of the spectrum, to assets worth less than £10m, which are often deemed too small for institutional investors and often too large for private investors, such as high-net-worth individuals. Three new funds in particular are pursuing this strategy: AEGON Asset Management's Active Value Property Fund, First Property Asset Management's UK Pension Property Portfolio LP, and Clavis Walden's Piccadilly UK Commercial Property Income Fund. The latter was, incidentally, the first investment vehicle to be launched as a property authorised investment fund (PAIF), an open-ended structure offering the same UK tax benefits as a real estate investment trust (REIT).
With so much investor interest targeting core strategies, the value-add space in Europe has become somewhat quiet. But one UK fund has been one of the first to buck the trend: Columbus UK Real Estate. It is managed by Columbus Capital Management, the specialist value-add focused division of Schroder Property, and raised £80m from institutional investors in its first closing.
Joe Froud, managing partner at Columbus, told IPE Real Estate he believed investors' focus on core investments in the UK had led to pricing inconsistencies in the value-add segment of the market. Froud said many fund managers have been prompted into raising core funds because of the overwhelming demand for such products from investors. It wasn't until the end of 2009 that he was able to gain interest from investors, but given the growing competition for core UK assets and a lack of supply from vendors it may not be long before subsequent value-add funds are launched.
Another vehicle that differed slightly to the norm was Nordic Real Estate Partners's new Nordic logistics fund, which raised SEK1.6bn (€166m) from a group of large Nordic and UK institutional investors. The fund has been set up as a club structure containing Swedish life and pensions provider SPP Livförsäkring, Swedish pension fund Vattenfall Pensionsstiftelse, along with investors managed by Schroder Property Investment Management, and a number of UK pension funds represented by CBRE Investors' global multi-manager business. SEK900m has been invested in a seed portfolio of prime logistics properties located in Sweden and Finland.
Further up the risk spectrum, private equity-style opportunistic strategies are continuing to find the task of raising capital difficult, but the sector is by no means moribund. Capital raised globally during the first quarter of 2010 is estimated at $9.8bn (€7.37bn) by data analysts Preqin. This represented a modest rise on the capital raised during the fourth quarter of 2009 ($9.4bn), but is the third consecutive three-month period when capital raised has been less than $10bn.
The vast majority of this capital was raised in emerging markets and North America. Five funds targeting North America raised $3.6bn, and three funds targeting Asia and the rest of the world raised $5.5bn. By contrast, only $600m was raised by four funds investing in Europe.
Preqin's research also showed that not only had the number of funds in the market declined, so had their capital raising targets. It also highlighted the increasing amount of time it took managers to raise capital. For example, funds that closed in the first quarter of 2010 spent an average of 18.8 months fundraising, while funds that closed in 2006 spent, on average, less than 10 months in market.
"The first quarter of 2010 was again slow for private equity real estate fundraising. Although investor confidence is slowly returning, this has not yet translated into increased commitments," said Andrew Moylan, real estate data manager at Preqin. "Fund managers are still finding it very difficult to raise funds, with vehicles closed during the first quarter of 2010 spending, on average, over a year and a half in the market.
Preqin did reveal that investors said they would be more active in 2010 than they were in 2009, and so the firm is expecting an improvement in fundraising in the coming quarters.
"But, with investors receiving very few distributions from their existing fund commitments, it is not necessary for them to invest at the same pace as they did in previous years in order to maintain their real estate allocations," Moylan said. "As a result, fundraising is set to remain challenging, and although some firms will successfully close funds in the coming months, investors will need to see more in the way of profitable exits and stabilisation in property prices before conditions improve significantly."