In niche sectors, it is getting harder to scale through privatization

With Carlyle’s $8bn fund joining the hunt for specialized real estate, competition for scalable platforms will be fierce after a wave of consolidations.

Niche property types have become a potent selling point for managers looking to attract institutional capital.

The Carlyle Group found that out firsthand this week. It held its biggest and quickest final close for a real estate fund, securing $8 billion for Carlyle Realty Partners IX. Only the second mega-fund of 2021, the vehicle is focused on single-family rentals, active adult senior housing, self-storage, data centers and movie studios.

The Washington, DC-based firm is far from the only manager to capitalize on the demand for specialized real estate. Just last week, Bain Capital closed its second real estate fund on $3 billion – double its initial target – with a mandate to invest in life sciences lab space, content creation real estate and other newly popular strategies. Earlier in the year, Harrison Street hit the $2 billion hard-cap for its eighth niche-focused fund. The list goes on.

By catering to the needs of specific end uses, niche properties can often command premium rents. Most of these assets are also attached to industries that benefit from ongoing secular and/or demographic trends. Add in falling yields from traditional property types, and increased demand for specialized real estate is a logical outcome.

Less clear is how so many well capitalized managers will access niche strategies at scale. By definition, these are relatively small pools of assets, representing only a fraction of the overall holdings in the four main food groups of office, retail, residential and industrial.

One avenue for large-scale deployment into specialized real estate is the privatization of listed platforms. The prevalence of such deals is evident among the finalists for this year’s PERE Global Awards, which were rolled out this week.

Two data center deals, KKR and Global Infrastructure Partners’ $15 billion privatization of CyrusOne and Blackstone’s $10 billion take-private of QTS Realty Trust, both make repeated appearances on this year’s awards shortlists. Ares Management and Pretium’s $2.6 billion privatization of single-family rental owner Front Yard Residential is also a featured transaction.

Historically, listed operators have proven to be better aggregators – or at least earlier adopters – of niche property types. This is particularly true in the data center and self-storage sectors. As more private managers look to put large funds to work in niche sectors, the listed market is a likely to be a highly targeted arena. Indeed, so-called alternative property types now account for the majority of US REIT assets, representing 62 percent of the REIT universe, compared with 38 percent in 2005, according to an October JLL report.

However, the REIT space is not a limitless fount of buying opportunities. In fact, after this year’s wave of data center consolidations, there are only two pure-play REITs left in the sector: Equinix, which carries a $73 billion market capitalization, and Digital Realty Trust, at $47 billion. Similarly, when Pretium and Ares delisted Front Yard Residential, the number of listed SFR companies fell to two.

Inevitably, demand from public equities investors will enable more niche property platforms to be listed. Single-family specialist Tricon Residential, for example, which was previously listed only on the Toronto Stock Exchange, adding a dual listing on the New York Stock Exchange in October. While this type of activity will replenish the supply of acquirable platforms in the long run, a heightened appetite for niche property IPOs means private managers will face more competition for portfolios in the near term.

For groups like Carlyle that raised broad pools of capital to invest into narrowly focused property types, the listed market is a source of readymade, scalable platforms. But the clock is ticking.

To cast your ballot in the 2021 PERE Global Awards, please click here. Remember the deadline to vote is midnight PST on Friday, January 14, 2022.