With investor demand for value-add real estate remaining robust, some managers targeting the strategy are achieving their most successful capital raises to date.
Greystar Real Estate Partners, for example, is currently on track to raise its largest-ever value-add fund with Greystar Equity Partners X. The Charleston-based real estate investment manager raised $1.35 billion in its first close, according to a filing with the Securities and Exchange Commission last week, and is fast approaching its $1.5 billion target. PERE understands Greystar set a $2 billion hard-cap.
The 10th fund in the series surpassed the $1.25 billion raised by predecessor Greystar Equity Partners IX in January 2017, illustrating rising investor interest. Fund IX launched in 2015 with a $1 billion target and reported a first close of $200 million, as previously reported by PERE.
Greystar’s Fund X is one of the largest value-add funds on the market by target size, and the second largest based on capital raised, according to PERE data. Fund X’s $1.5 billion target is the fourth largest out of the value-add funds on market. Angelo Gordon’s AG Realty Fund X and KSL Capital Partners’ KSL Capital Partners V both target $2.7 billion, and PAG’s PAG Real Estate Partners II is aiming to hit $2 billion. The $1.35 billion Greystar raised for its first close is second only to Angelo Gordon’s $1.9 billion raised so far for AG Realty Fund X.
Capital raised for value-add funds peaked in 2014 with a total volume of $36.68 billion, according to PERE data. Fundraising volume has declined slightly since then, with $36.56 billion, $29.91 billion and $32.06 billion recorded in 2015, 2016 and 2017, respectively.
Value-add was the most popular real estate investment strategy among institutional investors, according to the 2018 Institutional Real Estate Allocations Monitor. The study, conducted by Cornell University’s Baker Program in Real Estate and real estate advisory firm Hodes Weill & Associates, collected research on a blind basis from 208 institutional investors that spanned 29 countries.
Ninety percent of respondents in the 2018 survey said they are actively focused on value-add strategies, compared to the 86 percent reported the year prior. Opportunistic strategies have also been gaining ground, increasing to 75 percent this year from 72 percent in 2017. In contrast, the core strategy saw year-on-year declines. Sixty-three percent of institutional investors said they are actively focused on core, down from the 69 percent reported in 2017.
“Investors are, at this point in the cycle, prepared to take a little more risk on improving assets rather than just buying core or core-plus assets,” Hodes Weill managing partner David Hodes told PERE.
There is a general perception that core real estate is fully priced, according to Hodes. Interest rates have been rising, and investors likely anticipate increasing cap rates and may have concerns about valuations peaking, the report noted. There is a concern that if the market has peaked or plateaued, core assets won’t appreciate further, Hodes said. Opportunities for excess returns lie in situations where assets need physical or leasing improvements, but going from core to opportunistic might be too large of a leap up the risk curve for many investors, which makes value-add a good fit.
In 2018, 48 value-add funds have closed so far, according to PERE data. GLP’s GLP China Value-Add Venture I was the heavyweight champion, closing on $1.6 billion. CBRE Europe Value Partners II, which launched in 2017, was the second largest value-add fund of the year, raising $1.13 billion. AEW Value Investors Asia III closed on $1.12 billion after launching the fund in 2017.