EY - Trends in real estate private equity

Trends in real estate private equity

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Fund managers are building stronger, more robust platforms. These platforms are more transparent and flexible to revived market conditions and targeted investor appetites and demands.

The combination of investors’ interest in real estate’s investment potential and stricter regulations has driven real estate fund managers to drastically rethink, and in some cases overhaul, their investment and operating strategies over the last five years. Much of that time was spent in survival mode, where managers made adjustments to fee structures or service offerings in order to stay afloat.

By now, however, investor interests are so sufficiently well-defined that managers should be shifting their attention to long-term strategy.

Getting in front of limited partners

Recognizing investors’ favoritism towards fund managers with proven track records and flexibility toward their focused investment interests, few managers remain exclusively committed to closed-end fund models. Today’s successful managers understand that, to stand out in a heavily saturated market, they have to broaden their services.

Rethinking joint ventures

Joint ventures have long been a staple for doing deals in real estate. Now, as the downturn exposed lapses in due diligence and documentation across the sector, fund managers are taking a closer look at their partnership structures, and putting greater transparency measures in place, particularly around property management practices.

Outsourcing

As real estate fund administration services become more sophisticated, fund managers are increasingly outsourcing internal functions.

Many are investing heavily in building complete outsourcing packages that include property accounting, along with fund administration, such as depository bank services. Combining these services means offering fund managers “one-stop shop” platforms that are especially attractive to large, global funds, which are driving this trend as a cost-savings decision.

Deal flow

Pricing disparities between top international markets and all others continue to widen, and real estate opportunistic equity funds and others with higher-return strategies are finding themselves all but priced out of primary cities. In addition to diversifying geographically, managers are extending further on both the risk and creativity spectrums to get deals done.

Interest rates and cap rate expansion

The real estate market is coming to an inflection point. As investors anticipate continued interest rate rises, many are contemplating their strategies for realizing asset value in light of more expenses, debt and cap rates rising.

Interest rates and cap rates rising*

EY - chart - interest rates and cap rates rising

Securitization

The commercial mortgage-backed securities (CMBS) market has made a significant comeback in the United States; however, the latest securitized real estate deals look very different from 2007, and private equity funds are at the head of a wave of “megadeals,” or those greater than US$1 billion.

US CMBS issuance

EY - chart - US issuance of commercial mortgage-backed securities

SEC examinations

Most real estate fund managers that meet the threshold of US$150 million assets under management have now gone through the process of SEC registration, and are now taking steps to prepare for potential examinations.