The private equity party may be over but the news hasn't yet made it to the real estate buyout funds, which are seeking $105-billion (U.S.) in new capital, a sixfold increase from January, 2006.
There are 206 real estate-focused funds in the market raising capital around the world, an explosion of growth in what was once a niche sector of private equity, according to data from London-based Private Equity Intelligence.
Last year, 116 new funds raised a record of $72-billion, and 2007 is set to surpass that amount with a total of about $75- to $85-billion. That's seen further increasing to $80- to $100-billion next year, the research firm said.
This contrasts with the rest of the private equity market, which is expected to raise slightly less this year than it did in 2006, said Tim Friedman, a spokesman at Private Equity Intelligence.
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"I think what you are definitely seeing is an interest in real estate funds from institutions, with the pension funds playing a large part. Many investors are making their first forays into the market while others are increasing their allocations," Mr. Friedman said.
Institutional investors have been drawn to office buildings, shopping centres and hotels, looking for stable returns that offset their long-term liabilities, said Neil Jacoby, president of investment manager Aurion Capital Management Inc.
"Basically, they look at their asset allocation studies and see real estate as offering nice steady returns that are higher than those of fixed income. It's a very attractive place for those institutions to be," said Mr. Jacoby, whose firm creates real estate investment portfolios tailored for mid-sized pension funds.
Since 2000, private equity real estate funds have averaged returns of between 16 per cent and 26 per cent, exceeding the returns for all private equity funds, according to a study by Private Equity Intelligence.
More importantly there is much less variance between the returns of individual real estate funds when compared with general private equity funds, a good selling point to institutions looking for lower risk investments, Mr. Friedman said.
However increased competition amongst real estate private equity firms could put the squeeze on some funds, particularly the newer entrants to the market.
"Managers may find it more difficult to gain the attention of investors in a more competitive market ... and an effective marketing campaign will become more important than ever in 2008 and beyond," the study said.
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