Deal volume skids to 2021 levels

Secondaries trading in real estate has taken a dip from the record high of 2022 amid a backdrop of higher-for-longer interest rates and a correction in valuations in the asset class.

Deal volume for the asset class fell 21 percent to $9.8 billion last year, from the record $12.4 billion the prior year, according to data from Ares Management shared with affiliate title Secondaries Investor.

The “overall decrease in volume relative to a record-setting 2022 was not surprising given the market environment,” Ares noted in its 2023 Real Estate Secondaries Market Volume report. Last year’s volume figure remains the third-highest on record, behind the $10.6 billion traded in 2021. In comparison, the secondaries market figures compare favorably to the direct real estate market, which saw a more than 50 percent decline globally last year, Ares noted.

The number of secondaries deals did not see as precipitous a drop as volume, with a 4 percent slump to 154 from the record 161 transactions the prior year.

Spring of hope, winter of despair

It was a tale of two cities for manager-led and investor-led transactions. Sponsor-initiated deal volume decreased by 35 percent to $6.2 billion, with no transactions worth $1 billion or more.

Most of the manager-leds, which were roughly $200 million-$500 million in size, focused on niche property sectors such as data centers, specialized industrial and storage, and single-family rental and manufactured housing, all of which “continue to enjoy healthy operating fundamentals,” Ares noted. GP-leds accounted for 63 percent of total volume, down from 77 percent the previous year.

“A lot of funds [are] approaching that point where they’re going to have to get extensions”

Paul Parker
Ares Secondaries Group

Investor portfolio sales, meanwhile, jumped 26 percent to $3.6 billion, buoyed by transactions in value-added and opportunistic funds. Pricing for most closed-end funds was between a 25-50 percent discount to net asset value, Ares found.

It attributed the larger discounts to the fact that most value-added and opportunistic fund NAVs have been marked down just 6 percent from their peak values in mid-2022, citing Burgiss data.

Transaction volume for open-end core funds in the US and Europe got off to a slow start in 2023 but recovered significantly in the second half of the year, pushing the overall volume to a high of $2.4 billion, according to the Ares report.

Sector shows growth potential

The private equity secondaries market has a turnover rate of around 2 or 3 percent, according to advisers’ estimates. Should the real estate secondaries market get close to that, it could become much larger than its current size. Speaking on a panel moderated by Secondaries Investor at PERE’s Europe Summit last year, Paul Parker, a partner in the Ares Secondaries Group, said that the record amount clocked in 2022 was a drop in the ocean.

“You’ve got a lot of funds which are approaching that point where they’re going to have to get extensions; you’ve got managers wrestling with LPs that are getting somewhat fatigued, they want their money back, they thought that was the business plan… and so they’re looking for that right solution,” Parker said.

By region, US-weighted partnerships accounted for just under two-thirds of transaction volume, with European ones accounting for just under one-third. Asia-weighted partnerships accounted for just 6 percent of volume.

Ares estimates there is more than $970 billion in NAV held in closed-end real estate funds, and that $180 billion of this is held in funds older than eight years. Outside of funds, there is more than $1 trillion of NAV held in non-fund structures such as joint ventures and separate accounts, Ares noted.

Mounting debt maturities within legacy vehicles, coupled with portfolios that need more time or capital to complete business plans, should converge with lower distributions from funds to drive “significant growth” in secondaries deal volume in the years to come, Ares wrote.