Despite the massive fund closings last month, as well as the continued appetite for real estate among institutional investors, there is a growing group of GPs who believe that capital flows to private real estate may be slowing down.
At a recent real estate conference in New York City, John Kukral, the head of Northwood Investors and the former head of Blackstone Real Estate Partners, told the delegates that he sees investor capital constricting going forward.
“I think the days of raising easy money have peaked and it's coming down the other side,” he said.
Kukral isn't alone in his assessment. Earlier this year, a report from property consultancy Kingsley Associates predicted that real estate fundraising was going to slow down as large LPs hit their target allocations. The firm noted that the difference between target real estate holdings and actual holdings had dropped from 150 basis points in 2005 to 40 basis points in 2007.
Earlier this year, a report from property consultancy Kingsley Associates predicted that real estate fundraising was going to slow down as large LPs hit their target allocations. The firm noted that the difference between target real estate holdings and actual holdings had dropped from 150 basis points in 2005 to 40 basis points in 2007.
“This trend toward portfolio balance is the main reason investors will commit less new capital to real estate this year,” the firm wrote in a summary of its report. “Accordingly, there will be increased competition for new capital in 2007.”
Yet despite the assessment of Kingsley and others, there have been few signs that things are slowing down. In June, Morgan Stanley closed the largest private equity real estate fund on record, raising $8 billion in equity for a vehicle that doesn't even include the US. That same month, Goldman Sachs closed on $4 billion for its latest Whitehall vehicle.
According to research compiled by Private Equity Real Estate, opportunity and value-added funds have raised approximately $30 billion through June 2007, putting this year on track to at least tie the record-setting $60 billion raised in 2006.
Of course, that number doesn't take into account the large number of funds in the market. The Blackstone Group will likely close soon on $10 billion for its latest property fund, while Lone Star is in the market with a $6 billion target. Then there are the legions of well-established firms like Beacon Capital Partners, Colony Capital, Macquarie Global Property Investors, Lehman Brothers, Rockpoint, Walton Street Capital and Westbrook Partners who are currently in the market with funds totaling a combined $17 billion.
While the fundraising numbers are clearly dominated by the mega-funds, there are clearly signs that activity continues to heat up among smaller and more geographically diverse vehicles as well.
One pension fund consultant says that his firm is currently seeing more funds in the market than ever before, particularly funds targeting new markets like Brazil, Central America and Mexico, in addition to India and China. In the US, he adds, former operating partners are continuing to spin out from their sponsors and raise capital on their own.
“I know that there are certain reports that say [fundraising] may slow down, but based on our observations, we think it will be as vibrant as it was [last year],” he says.
What a number of these downbeat assessments overlook, of course, is all the institutional capital outside of the US. There are huge piles of petrodollars in the Middle East looking for property investment around the world and there are a growing number of Asian countries that are establishing investment authorities in the mold of Singapore's GIC. China, for example, recently invested $3 billion in The Blackstone Group, the country's first entry into the private equity market. With the world's most populous country making plans to set up a $200 billion investment fund, one wonders how the fundraising climate will change when China starts investing in real estate.
Perhaps the range of opinions on the topic of fundraising suggests some uncertainty about the current state of the US real estate markets. But be it in real estate or world affairs, the US no longer has the influence it once did. As the industry's largest investors know all too well, it's a big world out there. And it's got plenty of money to spend.