Private real estate funds raised near-record levels of capital in 2016, as the industry saw a noticeable shift away from equity investments toward debt.
Globally, real estate fund managers raised $104 billion for new funds that closed in 2016, according to a new report from research firm Preqin. The firm expects that volume to rise by 10 percent with more information becoming available, which would bring it close to the post-crisis record of $123 billion reached in 2015.
But the strong overall activity marks a shift in the types of funds that successfully raised money. Opportunistic funds, the largest sub-group, collected $39 billion in 2016 – down from $60 billion in 2015. Core and core-plus funds fell from $14 billion to $11 billion. Meanwhile, debt funds saw their fundraising increase from $16 billion to $20 billion.
“Pricing for prime assets appears to be impacting investor demand for core and core-plus strategies, with fundraising falling in 2016,” Andrew Moylan, Preqin’s head of real estate products, wrote in the report. “In contrast, debt fundraising has increased, perhaps reflecting investor appetite for reliable income and a substitute for fixed income investments.”
The global shift toward debt mirrors a trend within New York’s real estate industry. Several development firms have launched debt businesses over the past year, as inflated property prices make equity investments less appealing and cautious banks create an opening to issue loans. Kushner, for example, has launched a debt vehicle called Kushner Credit Opportunity Fund that in November issued a $33 million loan to Heritage Equity Partners’ Bushwick project 215 Moore Street. The firm also bought mezzanine debt for JDS Development Group and Chetrit Group’s supertall Brooklyn project 9 DeKalb Avenue.
Preqin noted that small funds are increasingly struggling when it comes to fundraising, as money tends to concentrate in their larger peers. While 311 new funds closed in 2012, that number shrank to 211 in 2016.
The overall volume of dry powder – or money that has been committed by fund investors but has not been invested in properties yet – rose to a record $237 billion, up from $229 billion in 2015 and $136 billion in 2012. The Blackstone Group’s real estate funds alone sat on $33.2 billion in dry powder as of September.