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Real estate secondaries in a lull

Although the strategy is not front of mind for most investors, a new type of manager-led deal is set to attract more institutional capital.

Only 10 percent of investors polled for PERE’s Investor Perspectives 2021 Study plan to commit capital to real estate secondaries funds in the next 12 months.

The study’s finding is not entirely surprising for Philip Chapman, a real estate secondaries specialist with Lazard, given the current size of the secondaries market compared with the wider private equity real estate market.

For more insights from the Investor Perspectives 2021 Study, click here. For more on how we compiled the study, click here.

Last year, a number of major players raised their largest funds dedicated to the strategy. With significant dry powder, it is unlikely they are planning to raise further capital at this point in time. Meanwhile, some of the new players currently launching secondaries investment strategies are capable of utilizing in-house capital, without the need for immediate external fundraising. “Consequently, the option of investing capital into real estate secondaries funds is not front of mind for many investors because there are fewer opportunities to do so,” Chapman says.

“In the medium and longer term, however, it’s likely that more participants will enter this market,” Chapman adds, noting the real estate secondaries space is poised to grow rapidly on the back of new fundraisers tapping into the market opportunity.

According to CBRE Research, in conjunction with PropertyMatch, investments made in the secondaries real estate market are well-placed for outperformance, as trading via the secondaries market offers a cheaper entry point than the primary market, where a premium of up to 6 percent to net asset value is often paid.

Despite its benefits, investors appear uninterested to participate in the market directly through deals. The study found 80 percent of respondents have no plans to either buy or sell fund stakes in the next 12 months. The market for portfolios of limited partnership stakes, with diversified underlying assets, has been largely on hold since the outbreak of the pandemic, due to difficulties in valuing affected segments, such as retail or hospitality.

Manager-led recaps

Valuation uncertainty, however, has been mitigated by manager-led deals able to target specific sectors in high demand, including the industrial, residential and life sciences sectors, Chapman notes.

This is the case for Blackstone’s $14.6 billion recapitalization of BioMed Realty, a real estate investment trust with 11.3 million square feet of life sciences assets across the US and the UK. The deal, announced in October last year, exemplifies an emerging trend in the real estate secondaries market, Chapman says.

“The BioMed transaction was effectively the manager recapitalizing an asset from an opportunistic fund into a new, lower cost of capital vehicle and retaining the management. In that sense, it was a traditional secondaries transaction, but it was done explicitly to enable investors that were seeking opportunistic returns, or that wanted liquidity, to cash out and replace them with longer-term, lower cost of capital partners which wanted to be in that space.” While structurally this was a typical secondaries transaction, it was different from a cost of capital perspective, in that it was led by institutional investors – insurers, pension funds or sovereign wealth funds – with access to cheaper capital requiring lower returns over the long run. That is in contrast with the opportunistic funds traditionally more present in the secondaries space, seeking 15 percent-plus returns.

This type of manager-led transaction could become “increasingly prevalent” for mature portfolios or platforms which offer lower, income-led returns going forward, Chapman concludes.