Higher asset pricing led to a drop in private equity real estate deals during the first half of 2018, according to Preqin.
The data provider said the first half of this year saw two consecutive quarters of decline in both the number of deals announced and their aggregate value, compared with the strong performance in 2017.
In the second quarter of 2018, a total of 1,295 transactions were completed with a combined value of $62bn (€52.8bn), down from 1,623 deals worth a total of $77bn during the previous quarter. Preqin expects the second quarter numbers to increase by 10% as more information becomes available, but will remain below the $102bn recorded during the fourth quarter of 2017.
“The slowdown is potentially due to higher asset pricing, with fund managers moving to the lower end of the market for deal flow,” Preqin’s report said. The report highlighted that two-thirds of transactions in the second quarter were valued at less than $50m, compared with 59% the year before.
The second quarter of 2018 also saw a shift towards residential deals, which accounted for 27% of deal value, up from 15% in the second quarter of 2017, Preqin said. Office transactions were down from 36% to 28% over the same time period.
Preqin said all regions saw a drop in the number of transactions completed during the second quarter of 2018 compared with the previous quarter.
The largest deal completed in the second quarter of the year was the acquisition of Gramercy Property Trust by Blackstone Group for $7.6bn.
Tom Carr, the head of real estate products at Preqin, said: “Although private equity real estate deal activity has fallen for a second consecutive quarter in 2018, it doesn’t necessarily mean the industry should start to worry.
“Even if activity has fallen below levels seen through most of 2017, the first half of 2018 has still seen activity on par with levels recorded in 2016 and 2015.”
The majority of investors and fund managers surveyed by Preqin are concerned about valuations in the real estate deal market, Carr said.
“In response, fund managers might be shifting towards smaller deals; the second quarter saw a significant rise in the proportion of total deal value deployed in transactions valued at less than $50m.
“We’ve also seen a shift of capital being put to work in residential real estate, which is unsurprising given that over half of investors view residential property types as currently presenting the best opportunities,” Carr said.
