Debt fundraising has slowed, but investors remain keen

While our data show global real estate debt fundraising peaked in 2017, sentiment among institutional investors suggests the asset class is not out of steam.

The first half of 2020 was a far from bumper period in the world of real estate debt fundraising. According to data compiled by PEI Media’s research and analytics division, nine funds closed globally, collecting $4.4 billion. In 2019, $8.4 billion had been raised by the half-year point.

With covid-19 impinging on all aspects of property finance markets, our data team expects a further slowdown for the remainder of 2020, and into 2021.

However, as explained in this webcast, published as part of the on-demand coverage of our sister title’s PERE Asia Week, institutional investors have also indicated they will grow their allocations to property lending strategies. In a late 2019 survey by our data team of more than 100 limited partners, 21 percent said they were looking to invest more in real estate debt.

Here is further insight into the trends uncovered by our data-focused colleagues.

Fundraising peaked in 2017:

There has been a fundraising slowdown for private real estate debt strategies since the 2017 peak. That year, $41.7 billion was raised globally, dropping to $26.9 billion in 2018. Last year was slower still, with $12.6 billion raised.

Managers had varying degrees of success last year. Our data show 31 percent of funds closed beat their fundraising targets – a higher proportion than at any point since 2015. However, the same percentage also missed their targets. Investors are possibly becoming more discerning.

North America and Europe dominate:

As the private real estate debt industry has grown, so has its focus on North America and Europe. Between the start of 2017 and the end of 2019, 82 percent of the $81.2 billion raised had a sole focus on those territories. Since 2014, our data show just $7.4 billion has been raised with a sole focus on Asia-Pacific. Average fund size for Asia-Pacific vehicles is increasing – a trend evident across private markets, where fewer, larger funds are being raised.

The big get bigger:

Our debt fund rankings show fundraising is dominated by relatively few organisations. The PERE RED 50, published in May, revealed that the top 50 global fundraisers corralled $156.9 billion from 1 January 2015 to 31 December 2019. The 10 largest accounted for 43 percent of that. First-placed manager – AXA Investment Managers – Real Assets – raised $19.5 billion, outstripping second place Blackstone’s $8.5 billion.

AXA also topped the Real Estate Capital Debt Fund 25, published in June, which counts capital raised purely for European strategies, with $8.9 billion. Of the $52.7 billion gathered by all 25 managers, the top 10 accounted for $35.6 billion. Property lending remains a specialised pursuit.

The fundraising continues:

Our data from 1 April 2020 show managers were targeting $50.6 billion for funds in market, down from $55.2 billion in Q1 2019, but still ambitious. In total, managers had collected $24.6 billion through interim closes.

In addition to the 21 percent of LP respondents to our survey, which planned to invest more in real estate debt, 28 percent said they would maintain allocations, with 44 percent planning to invest on an opportunistic basis. Only 11 percent and 17 percent of respondents indicated they would increase allocations to core and core-plus property funds, respectively.

While the survey was pre-covid-19, there are indications investor appetite remains. On 7 July, law firm Goodwin published its annual funds sector update, including the results of an audience poll in which 35 percent of respondents said they expected investors to favour real estate debt strategies in 2020-21 – second only to value-add/opportunistic strategies.

Many predict investors will see debt as a risk-averse way to invest in real estate during this crisis. Although volumes will be lower this year, real estate debt is likely to remain an interesting niche for many investors.

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