Fundraising for EM strategies is still challenging, but a handful of recent successes shows where investor interest lies. Andrew Moylan looks at the numbers
The private real estate fund market has undergone significant changes in the past few years and this is particularly true for emerging market-focused funds. Many institutional investors are increasingly global in their outlook, and demand for emerging markets exposure remains. But today's picture of emerging market real estate fundraising is very different to the one seen before the global economic downturn. For the purposes of this article, all funds that are primarily investing in markets other than North America, Western Europe, Japan or Australasia are classified as emerging market.
As with all private real estate fundraising, capital raised for emerging market funds has declined in recent years, from a total of $34.2bn (€27.3%) raised by 77 funds that closed in 2008, to just $7.5bn raised by 33 funds in 2011. In 2008, emerging market funds accounted for 24% of all private real estate fundraising globally, with the $3.9bn MGPA Asia Fund III and the $3bn LaSalle Asia Opportunity Fund III among the largest funds to close that year.
Emerging market funds' share of total capital raised has declined since 2008, and they accounted for 14% of the capital raised globally by funds closing in 2011. In the years leading up to 2008, many institutional investors had increasingly been looking to create geographically diversified portfolios and the result was an increasing amount of capital being raised by private real estate funds investing in emerging economies. In recent years, however, a number of institutions have focused more on established, liquid real estate markets, resulting in less capital being raised for emerging market funds.
The fundraising figures from 2011 give some interesting indications as to how investor appetite for emerging markets has changed. $3bn was raised by the seven Latin America-focused funds that closed in 2011, including the $750m Prosperitas Real Estate Partners III and the $550m Pátria Brazil Real Estate Fund II. This was second highest annual total for Latin America after 2007, when eight funds raised $3.6bn. Brazil appears to be attracting more attention from investors, with five of the seven Latin American funds to close in 2011 focusing on Brazil. Another Brazil-focused fund, GTIS Brazil Real Estate Partners, held a final close on $810m in the first quarter of 2012.
In 2011, $4.1bn was raised by Asia-focused funds that achieved a closing, significantly less than the $26.3bn raised in 2008. Appetite for India-focused funds has declined recently. Only $800m and $700m was raised in 2010 and 2011, respectively, compared with $5.4bn in 2007 and $4.7bn in 2008. In contrast, there is still a significant level of appetite for specifically China-focused funds, with $3bn being raised in 2011. The record year for China-focused fundraising was 2008, when $5.4bn was raised.
There are currently 87 funds with a primary focus on emerging markets seeking investor capital, targeting aggregate commitments of $28.1bn. These funds make up 17% of the aggregate capital targeted by all private real estate funds globally. Asia-focused funds make up the largest number of these funds, with 44 Asia-focused funds in market targeting aggregate commitments of $15.7bn. Seventeen funds focusing on central and eastern Europe are targeting $4.9bn in commitments, while 16 funds targeting Latin America are seeking commitments of $3.2bn.
The largest emerging market funds currently being marketed include Asia-focused offerings by ARA Asset Management, which is targeting $1bn for ARA Asia Dragon Fund II to invest in office, retail and residential properties in Asia. Another is Forum Asian Realty Income III, which seeks to make structured equity and debt investments in, and in conjunction with, listed and private Asian real estate companies. Aetos Capital Asia IV and Alpha Asia Macro Trends Fund II are also each targeting commitments of $1bn. Brookfield Asset Management is also seeking commitments of $1bn for its Dubai Real Estate Fund.
Of the 16 Latin America-focused funds currently being marketed, Hemisferio Sul Investimentos Fund IV is the largest, with a $650m fundraising target. The fund will focus on income-producing properties in Brazil. Another Brazil-focused offering, SDI Desenvolvimento Imobiliário's SDI Brazil FIP, is targeting $450m to develop commercial and industrial projects in Brazil. Paladin Realty Partners' fourth Latin American fund is targeting $400m.
Within central and eastern Europe (CEE), VTBC-Ashmore Real Estate Partners I is targeting €500m to make investments in commercial and residential real estate development projects in Moscow, St Petersburg and other substantial Russian metropolitan areas, while Pradera Turkish Retail Fund is targeting the same amount of capital to invest in income-producing shopping centres in Turkey.
The private real estate fund market in Africa is still new. Nine funds with a primary focus on Africa have closed since 2005, raising a combined $700m. A further five are being marketed and have an aggregate target of $1.2bn. These include Ivora Africa Property Fund, which is targeting $500m to invest in commercial rental properties situated in growth regions across Africa. RMB Westport Real Estate Development Fund is seeking $250m to invest in real estate developments in sub-Saharan Africa.
While it shows that emerging markets exposure is not a consideration for a large proportion of investors, many others, particularly the larger and more sophisticated institutions, are interested in having a globally diversified portfolio. In terms of emerging markets, Asia has the largest private real estate fund market outside North America and Europe, and has typically been the region targeted first by investors looking for emerging markets investments. One-third of investors in private real estate funds have, or are interested in gaining, exposure to Asia. Other emerging markets are of less interest to investors; 5% state a preference for Latin America, a similar proportion is attracted to CEE, 2% is interested in MENA and 1% favour in Africa.
Many institutional investors see the value of including emerging markets exposure in their real estate portfolios, both for diversification purposes and potentially strong returns. In the short term, with many investors not actively looking for new investments - or focusing on markets closer to home - fundraising for emerging market funds is likely to remain challenging. In the medium to long term, however, it seems likely that emerging market offerings will become more important to the private real estate market as a whole.
Andrew Moylan is real estate data manager at Preqin