Trends in real estate private equity
Real estate capital markets
In facing tighter lending constraints from the banks, international investors are finding it challenging to match targeted returns.
The distressed markets in Europe and the United States have seen a number of trades but are still below desired volume.
The biggest issue yet to be resolved in the real estate capital markets is lack of liquidity in the debt markets. In Europe, some large banks have taken steps to exit international real estate lending altogether.
When factored in with the many others that have been winding down their portfolios or have stopped lending in the international real estate markets, the availability of bank financing is extremely limited.
What strategy (ies) in 2013 will be the most lucrative for deploying capital in 2013 (choose all that apply)?
Source: Ernst & Young LLP
Across North America and particularly in Europe, the story remains a tale of the haves and have nots. The gateway cities, including New York, Washington D.C., San Francisco, London and Paris are active real estate markets with a large amount of interested institutional capital.
Distress, distress, distress
The distressed markets in Europe and the United States have seen a number of trades but are still below desired volume. There will still be opportunities for distressed funds on the horizon, however. While most of the major US banks have worked through their heavy risk exposure, having been relatively successful at restructuring loans and a few managing to refinance at par, regional and local banks are still facing difficulty working out construction and development loans on their books.
Also, in Europe, most banks still cannot afford to take losses on their books in spite of their intent to exit international real estate markets. Continued market volatility has further delayed their ability to begin working through their portfolios.
Opportunities in the debt markets
It is not all a bleak picture. Lack of liquidity from the banks has made room for nontraditional lenders and insurance companies in the senior loan market. While insurance companies have a history as long-term lenders in the US, they are increasingly emerging as an alternative to bank lending in Europe as well. Naturally, they are more risk-averse, extending loans for the highest-quality assets and only within the 50%–65% loan-to-value range.
Fund-raising will continue to pose a challenge for first-time funds. Outside of the large, global US-based funds that continue to see commitments from sovereign wealth funds and major institutional investors worldwide, investors are still hesitant to participate in commingled funds. In the near term, investment managers will likely continue the trend of the last 18 months of working individually with investors on one-off deals.
What are the key challenges you are seeing from limited partners (LPs) to get into a first close (choose all that apply)?
Source: Ernst & Young LLP