PERE’s fateful eight 

In our concluding Friday Letter for the year, we make eight predictions about private real estate capital formation and deployment in 2019, including: dropping fundraising, moderating investing volumes and shifting of geographic focuses.

Past performance is not a guide to the future’. A platitude this well-worn adage might be, but that does not preclude past performance from being at least indicative. With that in mind, we consider eight trends that materialized in 2018 we think will proliferate in 2019.

  1. Fundraising – volumes:

The easiest bet can be made on fundraising for closed-end real estate vehicles in 2019. This year’s numbers – poised to be finalized – currently show $101.75 billion raised, one-third less than the cycle zenith of 2015 when $158.28 billion closed. Alarming for aspiring entrants to the market, this year’s money was raised for 144 funds, 55 percent fewer than 2015. Not that managers are waving white flags: going into 2018, 809 funds had an aggregate target of $240.3 billion; as we enter 2019, 817 funds are aggregating to a $251.43 billion target.

  1. Fundraising – Blackstone:

When news of Blackstone Real Estate partners IX’s launch emerged in the third quarter, the guestimates of its size began. The official target was ultimately set at $18 billion. But now the forecast is for $20 billion, the first closed-ended effort in the sector to reach that market if the firm manages it. Expect this to be an early headline in 2019. Expect too for the clear majority of the equity to be raised in a single closing.

  1. Fundraising – Japan:

Japanese institutions have long been anticipated as meaningful investors in private real estate markets globally, but 2018 was the year biggest brands made visible first moves. Government Pension Investment Fund, the world’s biggest pension with more than $1.2 trillion of assets, committed its first mandate in the sector to CBRE Global Investment Partners, for instance. GPIF has subsequently reportedly indicated it is targeting an increase of exposure to alternative assets from 0.2 percent of total to 3 percent in three years, roughly breaking down to $41 billion of investments in that time.

  1. Investment – volumes:

The data varies depending on where you look, but a prevailing consensus is that volumes will moderate, perhaps even dip next year. JLL, one of the world’s biggest brokers, for instance, believes they will lower from $730 billion this year to $700 billion in 2019, as capital values increase 2-3 percent, supported by rents at the same rate. Watch out for increasing development by 4 percent, all the while vacancy rates rise to 12.4 percent.

  1. Investment – geography:

JLL’s rival Cushman & Wakefield noted lacklustre activity in the US with transaction growth of just 0.6 percent year-on-year in the 12 months to June. Elsewhere, however, volumes were markedly better. In fact, both Asia, up 32 percent year on year, and Europe, up 16.4 percent year on year had their best showings in three years, the firm said. Expect no let up there given extra headwinds for ex-US investors, including increasingly expensive dollar hedges. Korean investors, for instance, have expressly swerved clear of investments stateside, for instance, claiming how hedging can shave as much as 1.5-1.9 percent from total returns.

  1. Investment – sectors:

Next year will be a testing time for real estate investment managers to demonstrate to both capital providers and occupiers they are turning service provider rhetoric into action. Landlord-tenant attitudes are increasingly for dinosaurs. Understanding the wants of the actual users of real estate is becoming paramount for every sector. No sector is safe from disruption, but logistics has the clearest runway for performance. Unsurprisingly, JLL recorded a 10 percent increase in investment in 2018, more than offices and retail. It is hard to argue against logistics continuing to be a top sector pick for institutional money in 2019.

  1. Investment – M&A:

It is the perennial head-scratcher for any managers looking to grow via acquisition: buy into a well performing manager at the height of its powers and at the top of the market for a premium? Or buy into a challenged manager at a lower part of the cycle for a discount? This week’s purchase by Sun Life of a 56 percent in the conjoined merger of its own manager Bentall Kennedy with GreenOak Real Estate to make a firm with $47 billion carried a similar valuation to ING Real Estate Investment Management, which CBRE bought in 2011 to merge with its own investment manager to make a $95 billion business. No aspersions being cast here on the two deals but the differences are noteworthy.

  1. Investment – disciplines:

Another where rhetoric and action do not always match. On PERE’s conference circuit, investors and managers alike are forewarning about stretching classifications to suit capital requirements, whether it is at the risk-return profile level – justifying value-add characteristics as core-plus, for instance – or at the market level – secondary locations masquerading as primary. Even in private real estate secondaries, qualifiable transactions appear to be proliferating with tail-end fund-orientated direct deals entering the strategy, even tail-end primary fund commitments where initial outlays have become visible sometimes. Whether direct or indirect, next year, we will see certain strategies stretch to snapping point.

That was the last opinion from PERE in 2018, but not the last we will be running on over the festive period. Tune in for the PERE 2019 Predictions series, in which we ask institutional investors to provide one salient trend they foresee happening next year.

That leaves us to wish you all a very merry festive season and a happy new year. Take a break – we are sure you have earned it – and we look forward to serving you again in 2019.

PERE edit team

p.s. If you have not already, do not forget to cast your vote in the 2018 PERE Global Awards to award the organizations and individuals that performed best in the last 12 months. Voting end on Jan 11.