Blueprint: Geopolitical impacts on private real estate, US and UK interest rate policy sentiment threatens to diverge, annual private real estate fundraising at lowest level in more than a decade

PERE's February Deep Dive highlights the ripple effects of geopolitics on private real estate investment activity globally; interest rates policy thinking is showing signs of divergence in the sector; fundraising totals for private real estate are the worst in more than a decade, just two years after hitting a peak in 2021; and more in today's briefing, exclusively for our valued subscribers.

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They said it

“There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is” 

Starwood Capital’s Barry Sternlicht speaking about the US office sector at the iConnections Global Alts conference in Miami Beach last week.

What’s new

A world impacted: but to what degree does geopolitics impact private real estate?

It’s a big world out there

Geopolitics has been a fixture in news headlines in recent months, be it the escalating war in the Middle East, the ongoing Russia-Ukraine conflict or the record number of global elections this year. But what do private real estate executives make of geopolitics’ impact on their investment decisions? Certainly, some share the perspective of one chief executive, who recently commented on our European roundtable: “None of those factors necessarily will directly impact where we might invest. Most of us as managers are in fairly established liquid Western or Asian markets that are pretty well matured.” As PERE examines in our February cover story, however, other leaders have recalibrated their real estate investment decisions in light of growing geopolitical concerns, leading to notable shifts in which markets, sectors and asset types organizations are now allocating capital. Read more in our cover story here and listen here for our podcast with Oxford Economics associate director Abby Rosenbaum on how today’s geopolitical tensions could negatively affect real estate returns.

Hoping for cuts

Central banks in both the US and UK opted to keep rates steady last week, but there is hope growing of cuts on the horizon. The Bank of England kept rates at 5.25 percent, with a three-way split on whether they should be held, rise or fall – the first time that’s happened since 2008. “The tone of the commentary was similar to that of the US Federal Reserve, but there are clear differences in economic performance between the UK and the US,” London-based real estate finance firm Zenzic Capital chief investment officer Tom Lloyd-Jones said in a statement. “While the Bank of England will be loathe to move ahead of the Fed – the leader of the orchestra – it may need to.” Indeed, the BoE’s move came just one day after the US Federal Reserve’s decision to leave rates unchanged at a range of 5.25-5.5 percent. “I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting… I don’t think that’s the base case,” Fed chair Jerome Powell said after the meeting, per the Financial Times.

Hitting the bottom

2023 was the worst fundraising year for private equity real estate in the past 11 years as the market continued to grapple with interest rate hikes and inflationary pressures, according to PERE’s latest fundraising report. A total of $138.83 billion was raised across 309 funds in 2023. Furthermore, 21.8 percent, or $30.4 billion of the total capital raised, came from the latest offering in Blackstone’s headline private real estate series, Blackstone Real Estate Partners X. This was a significant drop from the last cycle’s fundraising peak of $236.04 billion in 2021. The last time the private real estate market recorded a lower fundraising amount was in 2012 when a total of $122.07 billion was garnered across 485 funds. Meanwhile, secondaries as a strategy was a bright spot in 2023, where the percentage of total capital raised for the strategy grew from 0 percent in 2022 to 6 percent in 2023. Two of the biggest secondaries funds, Landmark Real Estate Fund IX and Blackstone’s Strategic Partners Real Estate VIII, were closed in December 2023.

Trending topics

An assignment with alignment

Heard the one about the insurance investor that also wanted to be a third-party investment manager? The trend was given further momentum by Manulife Investment Management, the Canadian insurer and interview subject in the latest issue of PERE. We caught up with Marc Feliciano – his LinkedIn here – who was appointed global head of real estate in 2022 to realize the firm’s ambition to become a fully-fledged manager alongside a principal investor, to hear all about it. Read the interview here. He told us Manulife IM is plotting to be a multi-disciplinary real estate operation able to execute both equity and debt transactions, up and down the capital stack. PERE explored the implications of starting a business today: is its lack of track record a problem or a bonus given it means no legacy issues? That was a debate. Undebatable, however, was the power of having a marquee insurer parent able to dig deep for co-investments, which can exceed 10 percent of a fund’s total commitments. “That number certainly creates standout alignment,” commented one capital advisory executive.

Bridging the gap

Luxembourg-headquartered Sienna Investment Managers has introduced a consulting business to help Korean investors manage troubled assets in Europe. Last month, the firm promoted Hazel Cho to head of Korea, a role in which she will continue to develop relationships with Asian investors while also spearheading the service, according to a PERE report. With 30 percent of Sienna IM’s real estate capital coming from Korea, Cho has been focusing on improving communication between the firm’s existing investors and its asset management team in the face of price corrections and growing refinancing pressures in Europe. But Cho told PERE the firm started also providing consulting services to outside investors because many investors need a third-party perspective in managing their investments.

Not all is gloomy in the office market

Still reeling from pandemic disruption, the office market is starting to see some encouraging data. In London, companies are in the market for close to 12 million square feet of office space, according to Knight Frank, a 34 percent jump on last year. Some 80 percent of those firms are looking to upsize, and overall requirements are now at a 10-year high, per the brokerage. In all, 40 of those requirements are coming from companies each looking for more than 50,000 square feet of new office space. Meanwhile, in the US, signs of improvement are also starting to emerge, according to the quarterly VTS Office Demand Index, which tracks unique new tenant requirements of office properties in prime US markets. New York, for example, saw a nearly 40 percent jump in new requirements, thanks to tenants looking for space of more than 50,000 square feet, per the report.

Data snapshot

Best entry points

The years 2024-25 are expected to offer the best time to invest in private real estate since the global financial crisis, as the best returns are generated after the market hits the bottom, according to a Cohen and Steers report released last week. Looking back, funds with a vintage between 2009 and 2014 produced the best returns, with an average median IRR of 14.7 percent.

People

Two heads are better than one

Ares Management has promoted Julie Solomon, formerly global chief operating officer for the firm’s real estate business, to co-head of real estate. Solomon [her LinkedIn here] now sits alongside existing head of real estate Bill Benjamin. She joined Ares in 2013, originally as partner and head of product management and investor relations for real estate, before becoming COO at the beginning of 2022. The announcement follows a busy few months for the Los Angeles-based firm’s real estate team, which manages around $49 billion in assets. In December, Ares closed the joint-largest fund ever raised for real estate secondaries at $3.3 billion, and partnered with Abu Dhabi sovereign wealth fund Mubadala and real estate company Aldar Properties in a $1 billion joint venture to invest in real estate credit opportunities in Europe. In January, it announced a $500 million joint venture with manager and developer RXR Realty to target office properties in New York.

Investor watch

Real estate weighs on NBIM return

Norway’s Government Pension Fund Global, the world’s largest sovereign wealth fund, has overturned steep losses incurred in 2022 with its highest-ever return on investments in Norwegian kroner in 2023 – notwithstanding a drag on performance from the real estate portion of its portfolio. GPFG returned 16.1 percent for the year, the equivalent of NKr2.2 trillion ($208 billion; €194 billion), according to Norges Bank Investment Management, which manages the fund’s investments. Unlisted real estate, which accounts for 1.9 percent of the NKr15.8 trillion fund, was the only asset class in its portfolio to make a loss for the year, with a return of -12.4 percent. This compares with 0.1 percent for the previous year. According to data on NBIM’s website, 2023 was the first year in at least the past 12 in which the value of the fund’s unlisted real estate investments dipped year-on-year, falling to $29.6 billion from $33.5 billion in 2022.

This week’s investor meetings

Tuesday, February 6

Wednesday, February 7

Thursday, February 8

Friday, February 9

Today’s letter was prepared by Jonathan Brasse, with Evelyn Lee, Charlotte D’Souza, Miriam Hall and Christie Ou contributing.