What a drop in real-estate fundraising says about investor thinking

Fewer funds, but with more capital, points to strategic transformation in commercial real estate

March 29, 2021

Traditional closed-ended commingled real estate funds last year raised the least amount of money in almost a decade. But it’s not because investors are avoiding the sector, where allocations continue to rise, and the size of funds is at a new high.

Fundraising momentum across the industry fell last year to $130 billion, its lowest since 2012, and from $201 billion in 2019, according to data platform Preqin.

Such drops in fundraising often come in part amid slackening demand from investors. For instance, the 2012 trough came during a period of deep uncertainty following the Global Financial Crisis.

Last year, the pandemic played a role in the decline. But there was another, bigger-picture issue at hand: investors opting to wait for exposure through existing relationships with the largest funds, which are now bigger than ever.

Shunning new relationships, investors are preferring to queue up and wait. Indeed, some 66 percent of investors prefer to back managers they already have a relationship with, according to data from Cornell University’s latest Institutional Real Estate Allocations Monitor.

“So-called mega-funds have reached new highs in terms of size, while commitments to first-time or newer managers are often deferred,” says Gianluca Romano, global head of indirect capital research at JLL. “That’s largely due to an internal capacity issue for investors.”

There is more capital – particularly among large-scale investors – earmarked for real estate than there are institutional quality investment opportunities that meet investor objectives.

“Those larger funds remain popular and there’s clear competition among investors to access them,” says Romano.

Lying in wait

The world’s institutional investors on average remain below their average target allocation.

The abundance of capital hunting for commercial real estate has seen projected target allocations for 2021 rise on average by 30 basis points, according to Cornell University. The 2020 average shortfall between target and deployed was 60 basis points.

And average target allocations are forecast to increase to around 10.9 percent this year, according to Cornell University.


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For example, U.S. pension fund, California State Teachers’ Retirement System, has increased its real estate allocation target to 14 percent and has a long-term plan to get to 15 percent while reducing its allocation to public equity. Alecta, the largest occupational pension provider in Sweden, wants real estate to account for around 15 per cent of its increased 20 per cent allocation to real assets (infrastructure and alternative credit).

Staying the course

While the COVID-19 pandemic has highlighted the benefits of diversification into private real estate for institutional portfolios, capital is struggling to deploy because of the lack of deal flow. Of IPE Real Assets’ list of top 100 real estate investors, 59 have deployed less than the average target allocation.

“It takes time for investors to find opportunities that meet objectives, it takes time to approve those investments, and then it takes time to deploy the capital,” Romano says. “Even if an investor commits enough capital to meet its current target, that capital may not be fully deployed until year three. In the meantime, target allocations are changing annually.”

With more than 1,000 funds currently in the market seeking to raise over US$ 440 billion and the bar being so high for new fund manager relationships, alternatives to the fund, such as joint ventures, separately managed accounts, as well as club deals and co-investments, are set to become more prevalent in the coming months.

“The reasons for this are varied such as investors seeking lower fees and greater control and/or visibility on the investments,” explains Romano.

Already, joint ventures are rising in popularity. Globally, 27 percent of investors are looking to allocate more to joint ventures, according to an INREV survey. Such alternative investment strategies will sit alongside existing funds – with some funds currently in the market or coming around to the idea of transforming away from classic fund structures.

“The capital still needs a home and given the amount still sat on the side lines, we could see investment managers rethinking their respective offers in the coming months.”

Contact Gianluca Romano

Global head of indirect capital research

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