2017 Global Market Outlook

Trends in real estate private equity

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Golden age or fading glory?

As we move into 2017, there are many signs that real estate funds have been in something of a golden age over the last few years.

Yet there are many in the market who would question whether real estate is now starting to head toward its eight-year nemesis known as the real estate cycle. With so much capital directed toward real estate investment globally, managers face high levels of competition for the few deals that come on to the market.

While there is much to suggest the real estate fund market is on solid footings, we are expecting some fault lines to show as 2017 progresses. Set against this context, we hope our Global Market Outlook for this year will provide some food for thought in advance of some interesting times ahead.

High demand for real estate, leading to record dry powder, technological advances that can improve operational performance both at asset and fund levels, and high asset prices are all features of today’s global real estate market.

Areas of focus

Technology and real estate investment: disruptors in the industry - The creation of real estate-specific IT and reporting systems, the adoption of new software packages and the development of platforms that can be tailored to a specific fund manager’s needs have all improved the efficiency of operations in the real estate space and enabled the expansion of the asset class into new areas.

Operational enablement: the tools of today and tomorrow – There is a trend towards the creation of shared service centers for back and, to some extent, middle office operations or toward outsourcing many of the transaction-based activities inherent in fund management entirely to specialist third parties.

Global capital transformation - It’s clear that investors continue to see value in real estate investing. In a quest for yield, capital from institutions is flowing away from more traditional investments such as fixed income and toward property assets. And, while fundraising by private equity real estate groups trended downwards through 2016, the dry powder held by these funds had reached record levels of US$238b by June 2016, according to Preqin data.

Dealing with market shocks: the valuations question - If there is anything the past decade has taught us, it must be that volatility is now a long-term feature of our markets. From the effects of the financial crisis that rippled across the globe through to last summer’s stock market falls in China, the oil price drop seen over the last 18–24 months and the surprise outcome of the UK’s European Union referendum, the economic shocks have come thick and fast over the last few years.

Sustainability agenda on the rise - Where once the issue of managing sustainability may have been viewed as a “nice to have” for real estate funds, today’s business and investment world is increasingly viewing responsible investing and environmental, social and governance (ESG) matters as essential to good practice and risk management.

Open for business - The last several years have seen a steady increase in the number of open-ended real estate funds being launched globally. In 2015, there were nearly 450 open-ended funds worldwide, compared with fewer than 200 in the pre-crisis years, according to Preqin figures. Almost half of these are based in Europe, where there has historically been a stronger market for open-ended structures.

New partnership audit rules on the way - Starting January 2018, new audit rules apply that will have a significant impact on most partnerships, including real estate partnerships in the US. While the exact detail and guidance from the Internal Revenue Service have yet to emerge, the fundamental changes center around new obligations on the partnership in relation to the Internal Revenue Service’s examination of a partnership.

BEPS: the final stages - The Organisation for Economic Co-operation and Development (OECD) is now finalizing its work on the Base Erosion and Profit Shifting (BEPS) initiative. While the initiative was designed to reduce tax avoidance by multinationals, the project captures all taxpayers that operate internationally, including real estate funds, pension funds and sovereign wealth funds.

Real estate platform deals on the rise - As real estate investment continues to increase in popularity, many investors are now also looking to platform-level deals, with fee streams earned by management companies fast becoming a new investment frontier. The last 12–24 months have seen a wave of platform deals, where investors have acquired stakes in management companies and mergers and spin-offs have been completed with investor backing.