High interest rates will continue to deter real estate fundraising and dealmaking in 2024, while also outlining a shift towards opportunistic and distressed strategies, and the need for small fund managers to adapt to the changing environment, according to the latest research from Preqin.

The alternative assets data provider has published its Preqin Global Report 2024: Real Estate which shows that private real estate fundraising dropped in 2023 to the end of September, with 306 funds closing – less than 45% of the number of funds that closed in 2022 as a whole.

The report also finds that aggregate capital raised in the first three quarters of 2023 amounted to $107.7bn (€99bn), which accounts for 56% of total capital raised throughout 2022.  

This fall in fundraising and funds closing, Preqin’s researchers say, can be attributed to funds in the market becoming “saturated”, as a greater number of funds compete for  capital in a difficult fundraising environment.  

From the beginning of 2023 to the end of the third quarter, the number of real estate funds in the market rose from 1,777 to 2,258 – a 27% increase.

Deal making has also remained subdued throughout the first nine months of 2023 due to higher interest rates dampening investment sentiment. During that period, 2,918 real estate deals closed, with a total value of $88.8bn. This represents 42% and 35% of 2022 deal closes and value, respectively, Preqin found.   

Investors hesitant to look past large funds, squeezing first timers  

Preqin’s research found that while the higher-for-longer interest rates have put pressure on real estate fundraising this year, the largest funds have benefited overall.

According to Preqin analysts, macroeconomic-driven fears have resulted in investors finding safety and security in the largest funds. In terms of fund size and investor preference, the top 10 largest funds closed in the first three quarters of 2023 accounted for 50% of the total capital raised. This is a notable increase compared to last year, when the top ten funds raised only 25% of the total. 

This boost for the largest funds has squeezed first-time funds, Preqin data shows. During the first three quarters of 2023, first-time managers raised $2.8bn – a substantial drop compared with the $15.2bn raised in the entirety of 2022. 

That said, Preqin analysts found that first-time, smaller funds may have been underestimated by investors. First-time real estate funds outperformed the median benchmark for their respective strategies when looking at funds of all sizes this year to the end of September.

For example, first-time North American funds achieved a median net internal rate of return (IRR) of 18% – over five times that of North American value-added funds with vintages between 2014 and 2016. However, they also demonstrated a higher degree of dispersion in performance compared with more experienced funds. This indicates that, while first-time funds have the potential to outperform, they also carry higher risks and uncertainties. 

Preqin’s researchers found that the office sector was a key driver of differing real estate investment trends in North America, compared to Europe and Asia-Pacific. The sector experienced a notable drop in transaction volume in North America, totaling $8.6bn in the first three quarters of 2023 – a little more than a quarter of 2022’s total of $31bn. In contrast, Europe and Asia-Pacific office transactions accounted for a larger proportion of the total deal value of 40% and 29%, respectively, by the end of 2023’s third quarter when compared to 2022. 

Henry Lam, lead author of the report and AVP of research insights at Preqin, said: “Interest rate hikes in 2023, especially in Europe, have further weighed on global real estate investment sentiment as well as fundraising.

“While fund managers with huge scale are gaining greater market shares, middle or small-sized fund managers are still struggling to close their funds due to the increase in the number of funds in the market.”   

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