INREV data shows that 2011 was the second-poorest year on record for European non-listed real estate fundraising, says Vitaliy Tonenchuk

As the European crisis continues to adversely affect the real estate industry, its consequences are again being reflected in another challenging year for fund raising. According to the annual INREV Capital Raising Survey, European non-listed real estate funds raised €9.3bn in 2011 - the second poorest year on record after 2009. In 2010, €10.5bn was raised.

The 2011 figure includes €7.3bn raised by respondents to the survey and an additional €2bn that INREV estimates was raised, based on interviews with funds that did not respond. The expectations for 2012 are also not encouraging: fund managers expect to raise slightly less equity than in 2011.

The survey, to which a record number of fund managers responded this year, tracks the value of capital raised by European non-listed real estate funds. Respondents were asked to state the amount of equity that they raised as well as the country and sector destinations of the capital that they deployed during 2011. Fund managers were also asked to state the amounts of new loans they secured in 2011, excluding refinancing of existing loans.

In 2011, the total value of equity raised fell by 9% on 2010. Most (86%) of the equity has been dedicated to funds with a core strategy, with 8% for opportunity and 6% for value-added funds.

These figures indicate that investors are choosing the safety of core funds. They confirm the results from the INREV Investment Intentions Survey 2011 where investors clearly indicated their preferences for core funds with low leverage, a trend seen since the 2010 survey. Value-added funds raised substantially less capital than in 2010 with €0.4bn raised in 2011 compared with €1.9bn in 2010.

Despite the low interest in opportunity funds in the Investment Intentions Survey, 19% of total equity raised by closed-end funds is going to these funds. This might indicate that investors in this style of fund see more opportunities in the current challenging market conditions. On average, opportunity funds raised larger amounts than core funds - €150m compared with €90m.

By fund structure, the survey shows that open-end funds attracted €4.1bn (56%) of equity, but at the same time €1.3bn was redeemed from these funds. At 4%, a very small fraction of equity capital was raised by value-added and opportunity open-end funds. In contrast, 27% of equity that was raised by closed-end funds was devoted to value-added and opportunity funds.

Only 24% of capital was raised by funds with vintage year 2011, indicating that in the current uncertain market conditions it is more difficult for new funds to attract equity capital than established funds with proven track records and strategies. Around 70% of new funds that raised capital in 2011 were closed end.

Pension funds continue to be the most active investor type, contributing 66% of capital in 2011, followed by life insurers. Funds of funds hold third position, with 7% of capital committed. Manager co-investments increased their share of investment, contributing 4% of total equity in 2011 compared with 1% in 2010. The survey also shows that 68% of equity capital was raised from investors that were new to those funds.

In 2011, German investors provided €1.4bn of equity but lost their leading position as the most important source of capital to UK investors, which committed €2bn. Dutch investors hold third place with €1bn of commitments. The UK and German investors were mainly interested in core open-end funds and invested more than 90% into this combination of style/structure funds. This is partly because non-listed real estate markets in these two countries have a large number of open-end core funds. Investors from other countries invested relatively more capital in closed-end funds. While UK and German investors dedicated most of their capital to domestic funds, investors from other countries were more interested in funds with non-domestic strategies.

Multi-country was the most popular regional strategy to invest in during 2011, attracting 54% of equity. Multi-country funds, which have broader Europe as their region of focus, attracted €3.1bn of capital. This result contradicts the conclusions from the INREV Investment Intentions Survey 2011, where almost 90% of investors preferred single-country funds.

On the debt side, the survey shows that fund managers secured a total of €5.5bn of new loans. Mainstream debt sources dominate the debt secured by non-listed real estate funds. Banks provided 91% of all loans via senior tranches and 2% via mezzanine loans. By fund style, value-added and opportunity funds secured 35% of all new loans. The higher share of secured loans compared with the share of raised equity can be explained by value-added and opportunity funds using more leverage than core funds.
The survey shows that only 30% of fund managers will try to secure new loans in 2012, while 21% will attempt only to refinance existing loans.

Alternative sources of debt did not play any major role in the funding mix of non-listed real estate funds in 2011. Insurance companies provided only 2% of all debt and none of the surveyed funds obtained loans from debt funds.

Only 12% of fund managers indicated that they planned to increase the weight of alternative forms of debt in their funding. The majority of these managers indicated that they expected to increase the use of loans from insurance companies. This could be due to the upcoming Solvency II directive, which will make it more attractive for insurance companies to provide real estate loans. None of the fund managers indicated that they currently consider including debt funds into their funding arrangements.

The final section of the survey focuses on the deployment of capital by the European non-listed real estate funds. In 2011, 109 non-listed real estate funds invested a total of €9.9bn. Most (€7.5bn) of the capital was deployed by core funds. Opportunity and value-added funds invested €1bn and €1.4bn, respectively. The UK was the most popular destination, with 29% of capital allocated to it. Other popular regions were Germany and the Nordics which, respectively, received €1.8bn and €1.1bn of investments from the funds.

In the Investment Intentions Survey 2011, most investors expressed their preference for real estate in Germany and the Nordics but the UK did not show up as a popular investment region. This can be partly explained by the fact that a low number of UK investors participate in INREV's surveys and they also traditionally invest domestically.

By sector, retail remained the top destination, with 36% of all investments, followed by offices at 27% and residential at 12%. It is also surprising that 10% of capital was invested in the leisure/hotel sector, much more than in previous years.

Vitaliy Tonenchuk is senior research and database manager at INREV