GLOBAL - The global real estate market has hit bottom, according to Ernst & Young, with the adviser saying investors should "brave themselves" for a growing number of deals over the next few years.

In its report on trends in real estate private equity, the company's global real estate fund leader Mark Grinis said commitments had shrunk to a third of the level seen in 2008, but he argued that the market had potentially "over-contracted".

"The market is much smaller in terms of the amount of equity being raised, the availability of debt financing and the number of transactions in the market," he said.

"However, there are now signs the sector is reaching the bottom, and fund managers should brace themselves for an acceleration of deals and financing activity to hit the market, albeit slowly, over the next several years."

The report argued that distressed deals would continue to be available and that the convergence of the bid-ask spread would allow for an increasing number of deals.

It also argued that there would be a shift in fund operating models over the medium to long term, as they adapted to the regulatory changes seen since the financial crisis.

Ernst & Young predicted this would lead to fees increasing in the future.

It said: "Although management fees have been squeezed over the last few years, they may actually increase again to cover additional costs incurred to comply with new regulatory and reporting requirements.

"However, other types of fees, such as acquisition, asset management and disposition fees that have historically been paid to sponsors, may get squeezed as the pressure to reduce fees results in the desire for better alignment with LPs [limited partners]."

The consultancy further highlighted the impact of regulatory changes on the real estate private equity market - saying it had been "lightly regulated" to date.

It said there was an increasing drive for transparency, with global real estate leader Howard Roth saying the previously "immature" industry was due to change.

"Global investors, regulators and pension advisers are all simultaneously demanding greater transparency in governance, reporting and controls for private equity real estate," he said.

"What was previously an immature industry is starting to take on an increased element of operational maturity and is benefitting from better deployment of technology solutions."

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