NORTH AMERICA – The top 10 most successful private equity real estate funds now control roughly 50% of all investment capital on a global basis, according to Ernst & Young (EY).

Mark Grinis, EY’s global real estate fund services leader, said: “These real estate commingled fund managers include the likes of Blackstone, Starwood, Lone Star, Brookfield and Rockpoint – these are the firms that are getting the lion’s share of the capital. 

“Around half of the $40bn (€29.7bn) of capital that has been raised this year comes from the top managers. 

“I would think that, at the end of the year, the total amount of capital raised by the industry will be at around $63bn.”

This is making it difficult for the other managers to raise capital, he said.  

EY estimates that there are a total of 425 commingled funds now in the market looking for capital.

One trend Grinis sees on a global basis with high-return funds is a move away from gateway cities and into more secondary markets. 

“We are seeing funds move away from the gateway cities such as London, New York and Hong Kong and into secondary cities like Austin, Denver, Copenhagen and Taipei,” he said.

The reason for this is higher yields and where real estate now is in the market cycle, he said. 

“The difference in yields in these markets can be as high as 300 basis points,” he said.

“Another factor is that we are now is the post-recession stage in the market, and real estate managers don’t have to worry as much about what their exit strategy will be in the secondary markets.”

The large institutional investors including pension funds are looking for more liquidity in their real estate investments, he added. 

“These types of investors are looking more closely at investment structures like club funds, separate accounts and joint ventures as a way to gain more control on their real estate investments and not be stuck on a long-term basis in the more traditional close-end commingled funds,” Grinis said.

The report by EY suggests there will be fewer opportunities in the future for fund managers to capitalise purely from the financial structuring side of their investments. 

Howard Roth, EY’s global real estate leader, said: “The funds that come out ahead of the competition in the next phase of growth will have one thing in common – an old-school asset management approach that realises maximum investment value by working closely with the real estate.”