Real Estate Private Equity Funds Are On the Rise
December 9, 2015
Purchasing power and capital distributions are at record highs in 2015 for real estate private equity funds. By mid-year 2015, private equity funds had increased 37 percent over year-end 2014. Additionally, Preqin reported a record $187 billion dollar return to investors in 2014. With countless new opportunities, private equity real estate funds are positioned to close out the fund cycle they began before the Great Recession.
High property valuations appear to be the primary driver of recent real estate exit activity. The Wall Street Journal reports that commercial real estate prices have reached some of their highest points since the market collapsed in 2008, thanks to continued low-interest rates and rising demand from buyers for high-performing assets. According to Real Capital, New York City’s average commercial real estate capitalization has reached 5.7 percent, more than double the yield on a 10-year Treasury bond.
For PE firms evaluating real estate investment options for their current fund cycles, the retail sector may offer promising opportunities. As consumer demand increasingly moves toward omnichannel shopping experiences, many retailers are seeking to shrink their square footage and cash in on their real estate assets. According to McClatchy News, Sycamore Partners’ $3 billion Belk buyout may provide the firm the opportunity to quickly recoup part of its investment through a sale-leaseback arrangement – in which Belk would sell its real estate assets and then lease them back from the buyer. Other retailers, such as Macy’s, are exploring options for spinning their real estate assets into other investment vehicles, including REITs and potentially private real estate funds.
However, while opportunities abound, real estate fund managers face increasing regulatory scrutiny, with the SEC’s Private Funds Unit undertaking a thematic review of the real estate fund industry in 2014. In a May 2015 speech, Marc Wyatt, acting director of the SEC’s Office of Compliance Inspections and Examinations, pointed to potential changes ahead: Fund managers who offer ancillary services, such as property management, construction management or leasing services, may be expected to justify their fees.
With uncertainty in the stock market, the global economy and interest rates, we continue to watch the real estate sector for changes that can affect our clients.
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