The European non-listed sector has raised the highest volume of equity since 2008, according to INREV’s latest survey. Yonna Henriksson examines the data

Although the INREV index showed that performance for European non-listed funds dropped from 3.6% to -0.6% in 2012, the non-listed funds sector still managed to raise the highest amount of equity since 2008. In addition, the share of the equity raised by value-added and opportunity funds has increased substantially compared with previous years. This all confirms investors’ growing appetite for risk and is an indication that investors have more confidence in the future of the market across the available products.

In total, €29.5bn was raised by the European non-listed real estate industry, according to the INREV Capital Raising Survey 2013. The survey covered 147 companies with €1.5trn of real estate assets under management (AUM) and for the first time, it covered the capital raising activities across the full spectrum of non-listed real estate vehicles. This includes funds, separate accounts, joint ventures and club deals, funds of funds and non-listed debt products.

The majority of the €29.5bn was committed to non-listed real estate funds at €11.5bn. However, it is interesting to note that another sizeable proportion (€9.5bn) was allocated to separate accounts investing in direct real estate. Joint ventures and club deals raised a significant €4bn (figure 1). These products allow investors to have more control over their investments, which, according to the INREV Investment Intentions Survey 2013, continues to be required by investors and in some part explains the popularity of these products.

European debt funds raised €3.6bn, signalling that they will also be a material part of the European real estate industry going forward. However, the number of debt funds is still small and a large part of the capital raised was for a few large senior debt funds.

The results of the survey also show how the relative share by products in the market is changing. When the equity raised by European real estate products in 2012 is compared with the breakdown of their current proportion of AUM, it shows that the share of separate accounts, joint ventures and club deals is growing at a faster rate than its current representation in the market.

Of the total AUM, 17.7% is held in separate accounts investing directly in real estate. However, when studying European equity raising figures, these vehicles raised the second largest share of capital in 2012 at 32.3%, a rate that outstrips their current proportional share of the market.

Allocations to joint ventures and club deals are also increasing at a faster rate than their overall allocation in the market. These raised 13.5% of the capital in 2012 but currently account for only 5.0% of total AUM. The results, once again, reflect the shift towards products where investors have more control and can influence managers’ strategic decisions.

Pension funds remain the largest investors across all products. However, sovereign wealth funds invest substantially more in separate accounts and joint ventures compared with the traditional fund model, indicating the importance of control for these investors. They committed 27.7% and 19.2% of the total capital raised to joint ventures/club deals and separate accounts respectively but only 4.6% to non-listed property funds. Insurance companies also prefer separate accounts to non-listed real estate funds at 28.2% and 13.0% respectively.

The €11.5bn raised by non-listed real estate funds in 2012 is still far from the peak of the cycle in 2007 when they raised €29.6bn, the highest amount since the survey began in 2004. It is also lower than the nine-year average of €12.8bn. Nevertheless, it is an increase on last year’s figure of €9.3bn and represents the highest amount of capital raised by non-listed funds since 2008.

It is also slightly higher than the €9bn the industry predicted would be raised in 2012 when asked in the previous year’s survey. This higher-than-expected figure suggests an increased positive attitude in the market and can be linked to the improvements seen in the global economy in 2012.

Core funds attracted 63.1% of the new equity, which was being allocated to this product.
This is a fall from the 85.8% of total commitments in 2011. It confirms the changing appetite for risk within the industry, as reflected in the Investment Intentions Survey 2013 conducted at the end of 2012 when there was a shift in investors’ preference from core to value-added funds.

Core has long been the preferred fund style for investors. However, the current high demand for core products is driving down yields. Investors are therefore beginning to look for products higher up the risk spectrum, which also shows in the amount of capital raised and a shift towards value added and opportunity funds.

Around 28% of total new equity raised was committed to opportunity funds. Signs of this shift were seen at the beginning of 2012 when investors’ preference for opportunity funds increased to 9.4% in 2012 from 3.0% in 2011, according to the Investment Intentions Survey. Additionally, opportunity funds are bigger by nature, which could explain the surge of capital into these funds.

Closed-ended funds provide further evidence of a move up the risk spectrum. Figure 4 shows that 47.2% of the equity raised was for core funds, which means that the majority of the commitments were made to non-core funds. And opportunity funds raised 40.1% of the equity, a significantly larger amount than value-added funds at 12.8%.

Multi-country funds raised the majority of the capital in 2012 at 56.7% compared with single-country funds at 43.3%. This indicates that investors are starting to diversify their portfolios more using multi-country funds. It is also connected to the shift up the risk spectrum where opportunity funds have a tendency to opt for multi-country rather than single-country strategies.

While these are interesting developments, core funds remain dominant and still account for the majority of the capital raised. And there is a seemingly similar picture of prudence in relation to the geographic provenance of capital. Three locations accounted for most of the capital: Germany, the UK and the Nordics. These countries attracted 75.6% of the commitments with Germany taking the largest share. It is a pattern that follows the trend of last year’s Investment Intentions Survey when investors showed increased interest in the so-called safe havens. Change is afoot, but in a measured way.

Yonna Henriksson is research manager at INREV