Last year, the number of European real estate funds in market across strategies reached its lowest level in five years, with a total of 158 offerings, according to PERE data. This was down from the five-year peak of 220 in 2017 and lower than the previous lows of 167 in 2014 and 2016.

And yet, the five European funds that have closed so far in 2019 have all raised at or above their targets, the data showed. The largest of the funds was Tristan Capital Partners’ European Property Investors Special Opportunities 5, which attracted nearly €1.7 billion and was almost 100 percent oversubscribed. The value-add/opportunistic fund was so popular the London-based firm found itself turning away around €1.5 billion.

Further successful hauls are expected this year. For example, Henderson Park, another London-based manager, has yet to reach a final close with its debut fund, Henderson Park Real Estate Fund I, but has already exceeded its original €1.3 billion target by €300 million as of December.

The demand for these vehicles is there. Across all institutional investors, Europe continues to command the largest share of global real estate allocations at 48.5 percent, followed by the US at 32.8 percent and Asia-Pacific at 10.1 percent, according to the 2019 Investment Intentions Survey conducted by associations INREV, ANREV and PREA.

One investor active in Europe is the Teacher Retirement System of Texas, which has made ongoing property investments in the region, most recently backing Swedish private equity firm EQT’s latest real estate fund with a €100 million commitment and an additional €150 million in co-investment capital in December.

“Long-term, Europe provides diversification to the Texas Teachers’ portfolio, and the marketplace remains highly liquid and relatively transparent,” said Craig Rochette, TRS’s senior investment manager in real estate. “On a global basis, there are pockets of strong relative value still available in Europe. Some of the drivers of that relative value are demographics and pockets of growth in certain submarkets, and digging further down, pockets of growth in micro locations and certain niche strategies.”

“The capital raising market landscape for new managers is extremely challenging, particularly in Europe where regulatory barriers to entry for capital raising and reporting are more complex and costly.”

Matilde Attolico, JLL

On the subject of relative value, there is a consensus of opinion. “On a relative basis, Europe is still a very attractive place to invest,” said Matilde Attolico, global head of funds advisory at JLL. From a currency perspective, North American investors that hedge overseas investments may find the region to be a more favorable environment for real estate opportunities. Meanwhile, European investors have retrenched from investing abroad, given the high costs of investing in markets like the US, and are focusing more on their home region, she noted.

Another reason is the regional market as a whole has not yet become fully priced. “While many investors worry that we are long in the cycle, the European economic recovery started later and many, including us, feel we have longer to go versus the US.”

However, the oversubscription of certain funds is not the result of fewer funds focused on the region, said Will Rowson, partner at real estate advisory firm Hodes Weill & Associates. “It would be a generalization to say that because the number of funds has gone down, the ones that are in market are succeeding. It depends on what they’ve achieved and what is in vogue with investors and having the ability to invest well and the track record to show that. If you’re a young manager and do not have a lot of capital behind you, it’s still hard; likewise if, for instance, you’re a larger manager buying a team to do PRS, it doesn’t always lead to success.”

He pointed out that a number of managers are seeking capital for retail in Europe, “but very few are raising any capital as the sector is so out of vogue.”

Attolico added: “Now we’ve seen fewer competitors come to market. The capital raising market landscape for new managers is extremely challenging, particularly in Europe where regulatory barriers to entry for capital raising and reporting are more complex and costly. Globally, I think probably 50 percent of managers going to market to raise a fund are not reaching their targeted final close amount, many are not even getting to that all important first close.”

In Europe, fundraising volumes have decreased the most among regional markets over the past five years, according to PERE data. In 2014, the region accounted for $45.97 billion of fundraising in 2014, compared with $45.55 billion in the US and $17.08 billion in Asia. In 2018, however, Europe represented just $22.7 billion of capital raised, while the US and Asia held relatively steady at $43.55 billion and $17 billion, respectively.

Discipline in a time of oversubscription

If anything, oversubscription is the result of fund managers remaining disciplined, PERE heard. Sasha Silver, head of client development at Tristan, noted that EPISO 5 was similar in size to its predecessor, which closed at its €1.5 billion hard-cap in 2015 and itself was oversubscribed by €500 million: “We could have doubled that in terms of the interest that we had, but we wanted to keep our promise to investors in terms of fund size and also the promise to ourselves in terms of what we thought was appropriate for where we are in the cycle today.”

This discipline extended to Tristan lowering its net return target from 15 percent in EPISO 4 to 12-14 percent for the latest fund, she added.

Performance indicators for opportunistic private real estate funds as a collective are challenging to locate. However, open-ended European funds reported returns of 6.5 percent on a 12-month basis and 7.3 percent on a three- and five-year basis as of December, according to research firm MSCI’s Pan European Property Fund Index.

Meanwhile, HIG Capital raised €673 million for its first dedicated European real estate fund, HIG Europe Realty Partners II, significantly exceeding the €500 million target for the value-add vehicle. Still, Riccardo Dallolio, head of HIG Realty Partners in Europe, said: “We limited size to avoid style drift and be able to focus on our target market, which we believe offers the best returns.”

“If you’re a young manager and do not have a lot of capital behind you, it’s still hard; likewise if, for instance, you’re a larger manager buying a team to do PRS, it doesn’t always lead to success.”

Will Rowson, Hodes Weill

On the smaller end of the fund scale, Rowson says Hodes Weill is looking at working with a UK-based value-add manager that wants to raise a maximum of £250 million ($331.89 million; €292.81 million) to avoid pressure to invest, and notes some other European firms are doing the same.

Attolico predicted that capital raising will be “flattish” globally this year, but up in Europe – for managers with track records: “Europe is the one place where I’m seeing these managers raising significant capital because there’s still demand for that product. I’m bullish on European capital trends.”