Real Estate Spotlight October 2010

8/8/2019 Real Estate Spotlight October 2010

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2/122 Real Estate Spotlight, October 2010 2010 Preqin Ltd. www.preqin.com

2

The private equity real estate market has

seen a dramatic change in its fortunes

over the past two years. Prior to 2008,

fundraising was increasing year-on-

year, investors were rushing to commit

to new funds and returns were strong.

The past two years, however, have been

characterized by poor performance,investor inactivity and slow fundraising.

There are some signs the market may

be improving, but in a turbulent market,

predicting when this will happen is a

difficult proposition.

Investor Attitudes

Fundraising has been slow throughout

2009 and 2010 to date, with quarterly

totals ranging from $7.6 billion to $15.4

billion. In comparison, quarterly totalsranged between $24.2 billion and $43.8

billion during the period 2007 to Q3

2008. The primary driver behind the slow

fundraising has been investor inactivity and

caution. Preqins recent real estate investor

survey found that just 24% of investors

made a real estate fund commitment in H1

2010.

During the boom years, investors

were continually receiving returns from

their existing private equity real estate

investments, which they were then re-

investing in new funds. As a result of

the economic downturn, investors are

receiving far fewer distributions from

their existing funds and therefore are notinvesting new capital at the same rate. In

many cases, investors have large amounts

of capital committed to funds that remains

uncalled. For other investors there is

no urgency to commit. With uncertainty

surrounding future real estate valuations,

institutions do not feel they are missing

opportunities by staying on the sidelines.

The same survey does, however, give

indications of a possible improvement in

fundraising in the future. 42% of investors

surveyed are planning to make new

commitments in the next 12 months, while

another 19% indicated they would consider

doing so. This does not suggest that a

dramatic upturn in fundraising is imminent,

but does suggest that quarterly fundraising

totals will begin to increase over the

coming year.

Performance

Performance for private equity real estate

funds has been severely impacted by

the economic downturn, with funds of

2006 and 2007 vintages most adversely

affected. Two-thirds of 2006 vintage

funds and 79% of 2007 vintage funds

are currently producing negative IRRs.

Recent performance is not showing any

signs of a quick reversal of fortunes, and

real estate has lagged behind other assetclasses which have seen a rebound in

performance.

As Fig. 2 illustrates, recent performance

for private equity real estate funds has

been mixed. 2007 vintage funds, although

deep in the red, have seen performance

improve over recent quarters. 2005 vintage

funds, in contrast, have seen declines

Just 24% of investors made a

real estate fund commitment

in H1 2010.

54

73

6661

3431

27

37

20 21

33.9

43.8 42.1

20.4

15.2 14

8.5 10.2

15.4

7.6

0

10

20

30

40

50

60

70

80

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

No. ofFunds

AggregateCapitalRaised($bn)

Source: Preqin

Fig. 1: Quarterly Private Equity Real Estate Fundraising,Q1 2008 - Q2 2010

-0.5

-0.4-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

1 2 3 4 5 6 7 8 9 10

Vintage 2000

Vintage 2001

Vintage 2002

Vintage 2003

Vintage 2004

Vintage 2005

Vintage 2006

Vintage 2007

Vintage 2008

Source: Preqin

Fig. 2: J-Curves - Annual Median Net IRRs by Vintage Year

MedianNetIRR(%)

Investment Year

The private equity real estate market has experienced dramatic change over the past two years, Andrew

Moylan looks at what this means for the future of the asset class.

What Now for Private Equity Real Estate?

Feature What Now for Private Equity Real Estate?



3

in the median IRR in recent quarters.

Clearly with many funds still suffering, fund

managers will be concentrating on asset

management and restructuring debt, with

the aim of turning the fortunes of their

funds around.

A Crowded Market

The aggregate target of funds in market

has fallen steadily since Q1 2009, but

there are still 400 funds in market,

targeting aggregate commitments of $129

billion. Between January and September

2010, 47 funds were abandoned or placed

on hold, highlighting that fundraising

remains an extremely challenging

prospect. While for some firms fundraising

has proven to be impossible, there are

signs for others of an improvement in

fortunes. In 2009, just 15% of funds met

or exceeded their fundraising targets, with

85% falling short. Between January and

September 2010, however, 19% of funds

to close have done so on target, while

24% have exceeded their targets.

Although it is clear that not every fund in

market will be raised successfully the

aggregate target of all funds in market

is more than two and a half times the

amount of capital raised in 2009 the

paralysis in the fundraising market that

was evident a year ago appears to be

easing. Firms raising funds thatfit with therevised aims of the institutional investor

community have been successful in

raising new funds.

A Changing Approach

The changing nature of the real estate

market has led to dramatic shifts in the

strategy preferences of institutional

investors and the strategies of funds

which are being launched. The rise in the

appeal of core funds has been marked,

with 86% of investors now having a

preference for this type of vehicle.

Fundraising for value added vehicles has

declined significantly. Value added funds

were responsible for 32% of capital raised

in 2007, but only accounted for 17% of

capital raised in January to September

2010. Opportunistic strategies have seen

a smaller proportional decline. Many

investors have also seen the appeal of

distressed opportunities and real estate

debt. Debt funds accounted for 24% of

capital raised in January to September

2010, with distressed funds accounting for

25%.

Between January and

September 2010, 47 funds

were abandoned or placed

on hold.

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8%4% 3% 5%

32%

26% 27%17%

49%

50%41%

29%

3%

4%

5%

25%

8%16%

24% 24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 Jan - Sep 2010

Debt

Distressed

Opportunistic

Value Added

Core-Plus

Source: Preqin

Fig. 3: Annual Breakdown of Capital Raised by Strategy, 2007 - September 2010

ProportionofCapitalRaised




Dry Powder

While fundraising may be slow, this has not

had a significant impact on the amount of

capital that private equity real estate fund

managers have at their disposal to make

new investments. As of September 2010,

these firms had $174 billion in uncalled

capital. If real estate fund managers feel

there are excellent opportunities available

(and that remains a big if), they are in a

good position to take advantage. North

America-focused funds have $98 billionof capital to call up, Asia and Rest of

World-focused funds have $39 billion and

Europe-focused vehicles have $37 billion.

It is obvious to all within the private equity

real estate industry that a return to the

fundraising levels of 2006 and 2007 will not

happen quickly, if ever, but there are some

encouraging signs for fund managers.

Many investors that spent much of the past

two years on the sidelines are showing

signs of returning and do plan to make new

commitments in the next 12 months.

Fund managers still have $174 billion of

uncalled capital available to invest and,

despite fundraising remaining slow, some

strategies are appealing to investors and

capital is being raised for these funds.

While most institutions do not feel they

will be adversely affected by delaying new

commitments at present, if the number of

transactions taking place picks up, fund

managers call up capital and investors

receive distributions from their existing

investments, then institutions are likely to

return to the market in greater numbers.

Fund managers that have adapted to

the changing attitudes of the institutional

investor community and successfully

conveyed how they intend to overcome

market conditions have shown that it is

possible to raise capital for new funds.

The information contained within this article is based on data from The 2010 Preqin PrivateEquity Real Estate Review. Now in its fifth year, the Review is the most trusted guide to thePERE industry available today. This publication includes 280 profiles of the most active investorsin private real estate funds, profiles of more than 360 profiles of the leading private equity realestate firms and detailed analysis including examinations of investors, fundraising, performance,dry powder, placement agents and fund terms and conditions.

The 2010 Review is currently available with a 25% off pre-publication special offer, making copies available for just: $995/595/715!For more information, including sample pages and details on how to order your copy, please visit:

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Data Source:

The 2010 PreqinPrivate Equity Real Estate Review

Some strategies are

appealing to investors and

capital is being raised for

these funds


Download Data

Dr. Peter Linneman

Professor of Real Estate, Finance

and Business PolicyWharton Business School

Henry Cisneros

Former Secretary of Housing and

Urban Development

United States Government

Marc WeissChair, Real Estate Investment

CommitteePartners Group

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alternative assets.intelligent data.



FirmTotal Capital Raised for Private Equity Real

Estate Funds in Last Ten Years (mn)Firm Headquarters

Niam 990 Sweden

ICECAPITAL Real Estate Asset Management 800 Finland

CapMan Real Estate 683 Finland

Sveafastigheter 330 Sweden

BPT Asset Management 285 Denmark

EVLI Property Investments 235 Finland

Andersson Real Estate Investment Management 228 Sweden

Orkla Finans 200 Norway

Genesta Property Nordic 176 Sweden

Nordic Real Estate Partners 162 Denmark

Source: Preqin

8

7

8

7

4

3

0.8 0.60.9 1.1 0.7

0.2

0

1

23

4

5

6

7

8

9

2005 2006 2007 2008 2009 Jan-Sep2010

No. ofFundsRaised

Aggregate

CapitalRaised(bn)

Source: Preqin

Fig. 1: Fundraising by Scandinavia-Based Firms,2005 - September 2010

7

1.3

0

1

2

3

4

5

6

7

8

No. of Fu nds in Market Aggregate Target (bn )

Source: Preqin

Fig. 2: Funds on the Road Managed by Scandinavia-Based Firms

5

2

0.9

0.4

0

1

2

3

4

5

6

Denmark Sweden

No. ofFirms

AggregateTarget(bn)

Source: Preqin

Fig. 3: Capital Targeted by Scandinavia-Based Firmsby Manager Location

Fig. 4: 10 Largest Scandinavia-Based Firms by Capital Raised for Private Equity Real Estate Funds in the Last 10 Years

Data Source:

www.preqin.com/reo

Real Estate Online

Preqins industry-leading product Real Estate Online featuresdetailed profiles on 25 Scandinavian Fund Managers.

For more information please visit:

Scandinavian Fund Managers

Fund Managers Scandinavian Fund Managers

Download Data

Kamarl Simpson examines fundraising by Scandinavian Fund Managers.
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Insurance companies are significant

investors in real estate, and as of September2010, the average real estate allocation

of these institutions is approximately $1.9

billion. The average target allocation to real

estate is approximately $2.4 billion.

39% of insurance companies that invest in

real estate have total assets of less than $10

billion. 35% have assets of between $10

billion and $49.9 billion. 10% have $50-99.9

billion in assets under management, while

13% of insurance companies have assets

of between $100 billion and $399.9 billion.Only 3% have over $400 billion under

management.

In terms of overall allocations to real estate,

34% have less than $500 million invested

in property. 18% have $500-999 million,

and 29% have real estate portfolios worth

between $1 billion and $3.99 billion. 6% have

over $10 billion in the real estate asset class.

Key Facts:

Insurance CompaniesAverage Allocation to Real Estate:$1,865mn (8.8% of Total Assets)

Average Target Allocation to RealEstate:$2,430mn (10.2% of Total Assets)

Source: Preqin

Fig. 3: Breakdown of Insurance Companies by Region

50%

80%

48%

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

North America Europe Asia and Rest of World

Source: Preqin

Fig. 4: Unlisted Fund Location Preferences of InsuranceCompanies

ProportionofInsuranceCompanies

Source: Preqin

Fig. 1: Breakdown of Insurance Companies by Size

Source: Preqin

Fig. 2: Breakdown of Insurance Companies by Overall Real EstateAllocation

Insurance companies account for a significant proportion of the private real estate investor universe,

Forena Akthar examines the investment preferences of these institutions.

Insurance Companies

Investors Insurance Companies



Of the insurance companies that invest

in private real estate funds, 80% have a

preference for Europe-focused vehicles.

This is no surprise considering that 62%

of insurance companies that invest in real

estate in general are based in Europe.

R+V Lebensversicherung is one Europeaninsurance company which was active in

private real estate in H1 2010. The 60

billion German insurer plans to invest

between 200 million and 300 million in

unlisted funds in the next 12 months. Half

of the insurance companies that commit to

unlisted property funds target North America-

focused funds and 48% are interested in

funds investing in Asia and Rest of World.

NLI International is a Japan-based insurer

that commits to private equity real estate

funds and it is advised in-house.

With regards to the fund strategies that

insurance companies are attracted to, value

added and opportunistic funds are the mostprevalent, with 68% having a preference

for opportunistic funds and 72% having an

interest in value added vehicles. 56% and

40% of insurance companies favour low-risk

core and core-plus strategies respectively.

Debt and distressed strategies are appealing

to 28% and 21% of insurance companies

that invest in private funds.

Data Source:

Real Estate Online

The information in Investor Spotlight is taken from Preqins Real Estate Online Product. There

are currently profiles for 146 insurance companies with an active interest in real estate.

To find out more information about this product, or to arrange a demo, please visit:

www.preqin.com/realestate

Download Data

Half of the insurance

companies that commit to

unlisted property funds target

North America-focused funds.

72%68%

56%

40%

28%

21% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

ValueAdded

Opportunistic

Core

Core-Plus

Debt

Distressed

FundofFunds

Source: Preqin

Fig. 5: Strategic Preferences of Insurance Companies

ProportionofInsurance

Companies

Insurance CompaniesFund ManagersInvestors

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Fundraising PERE Fundraising

Source: Preqin

76

273

381 376 383 378400

33

127

228

173147 134 129

0

50

100

150

200

250

300

350

400

Jan-2007

Jan-2008

Jan-2009

Jan-2010

Apr-2010

Jul-2010

Sep-2010

No. ofFunds

AggregateTarget($bn)

Source: Preqin

Fig. 2: Real Estate Funds on the Road over Time

NorthAmerica

EuropeAsia and Rest

of WorldTotal

Number ofFunds

216 103 81 400

AggregateTarget Size($bn)

66.5 36.0 26.6 129.1

Average Target

Size ($mn)

323 391 363 347

Fig. 1: Real Estate Funds on the Road

Source: Preqin

Recently Closed Real Estate Funds

TA Realty Associates IX

Strategy: Core-Plus, Value Added, Debt, DistressedGeographic Focus: USProperty Types: Industrial, Office, Residential, RetailTarget IRR (Net): 15-17%Final Close (mn): 1,850 (Aug-2010)Placement Agent: Not UsedLaw Firm: Goodwin ProcterSample Investors: Amherst College Endowment, City ofLakeland Employees Pension and Retirement System, City

of Phoenix Employees Retirement System, City of QuincyContributory Retirement Board, Essex Regional RetirementBoard, Fairfield Employees Retirement Fund, Illinois MunicipalRetirement Fund, Los Angeles City Employees RetirementSystem, Maryland State Retirement and Pension System,

Montana Board of Investments, Montgomery CountyEmployees Retirement System, New Jersey State InvestmentCouncil, Vermont Pension Investment Committee

Gateway Capital Real Estate Fund III

Strategy: OpportunisticGeographic Focus: Greater ChinaTarget IRR (Gross): 20+%Final Close: 374 USD (Aug-2010)Placement Agents: Morgan Stanley Global Financial Sponsors

GroupLaw Firm: Baker & MckenzieSample Investors: Harvard Management Company

Download Data

Fig. 3: 10 Largest Real Estate Funds on the Road

Private Equity Real Estate Fundraising

Fund Manager Target Size (mn) Strategy

Lone Star Fund VII Lone Star Funds 4,000 USD Debt and Distressed

Lone Star Real Estate Fund II Lone Star Funds 4,000 USD Debt, Distressed and Opportunistic

Aberdeen European ShoppingProperty Fund

Aberdeen Asset Management: PropertyDivision

1,500 EUR Core-Plus and Value Added

Carlyle Realty Partners VI Carlyle Group 2,000 USD Debt and Opportunistic

MacFarlane Urban Real Estate FundIII

MacFarlane Partners 1,500 USD Opportunistic

PS Fund IV Asia Fund Select Pacific Star Financial 1,200 USD Core, Core-Plus and Value Added

UK Property Income Fund Legal & General Property 700 GBP Core and Core-Plus

AG Core Plus Realty Fund III Angelo, Gordon & Co 1,000 USD Core-Plus and Debt

Aetos Capital Asia IV Aetos Capital Asia 1,000 USD Debt, Distressed and Opportunistic

Forum Asian Realty Income III Forum Partners 1,000 USD Opportunistic
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Los Angeles County Employees

Retirement Association issues RFI for

USD 400 million private real estate debt

mandate

The USD 35 billion Los Angeles County

Employees Retirement Association

(LACERA) plans to allocate up to USD 400

million to private real estate debt through

two separate accounts. The pension fund

is looking to hire up to two managers andhas issued an RFI. Responses to the

RFI are due by mid-October 2010, with a

final decision planned for early 2011. The

pension fund plans to supply new debt,

likely to be in the form of A-B structures,

B-notes, mezzanine pieces or preferred

equity on existing core assets, and will

be limited to a mixture of office, industrial,

retail and apartment assets with a focus on

the US.

Allianz Real Estate aims to achieve EUR30 billion allocation to real estate by

2014

The EUR 15 billion asset manager is

looking to double its assets to EUR 30

billion in the next four years. As part of

this on-going plan, it is looking to sell

around 100 German properties by the

end of 2011. It is planning to increase its

allocation to private real estate to 20% of

its overall real estate portfolio by 2013. It is

looking to achieve this through senior debt

investments and joint ventures, as well

as through funds that focus on specialist

sectors, such as logistics. Allianz Real

Estate is also planning to increase its

exposure to the asset class through direct

investments. It is looking to achieve this

through investment in high quality assets

on a global scale but with a focus on

Europe. It is planning to allocate 80% of its

portfolio to Eurozone markets, and is likely

to allocate 10-15% to US markets.

Ohio Police and Fire Pension Fund toplace redemption queue requests

The USD 10.5 billion public pension fund

is to place redemption queue requests for

its investments in RREEF America REIT

II and INVESCO Core Real Estate - USA.

The requests will be made either by the

end of this year or during 2011. It has not

decided how much of its investments in

the funds that it will redeem, but it will not

seek to redeem its entire holding. RREEF

America REIT II invests primarily in core

industrial, office, retail and apartment

properties throughout the US, and

INVESCO Core Real Estate - USA investsin industrial, office, retail and multi-family

properties in major metropolitan areas

within the US. The public pension fund has

a 12% target allocation to real estate.

Chinese insurance companies, such as

China Life Insurance, now authorized to

allocate up to 10% to real estate

Chinas Insurance Regulatory Commission

(CIRC) has published rules that will allowChinese insurance companies to invest

up to 10% in real estate. However, CIRC

has decided that investments in real estate

funds will be capped at 3% of total assets.

Insurance companies in China will also be

prohibited from becoming directly involved

in development projects, and they will not

be able to invest in residential property.

China Life Insurance decided last year that

it would appoint experienced real estate

investment professionals to assist it in

diversifying its portfolio once regulations

were in place.

San Bernardino County Employees

Retirement Association to invest in

global REITs

The USD 5 billion public pension fund

has announced that it will begin investing

in global REITs in order to gain a more

liquid real estate portfolio and is planning

to issue an RFP for managers in Q1 2011

through its advisor Townsend Group. The

pension fund has a target allocation of9% to real estate and a long-term target

of 20% of its portfolio to be allocated to

REITs, 50% to core and 30% to non-core

real estate.

Virginia Retirement System commits

USD 425 million to real estate

The USD 50.1 billion Virginia Retirement

System has committed approximately

USD 225 million to Carson Industrial, a

joint venture targeting industrial properties

in southern California and Houston. The

pension fund also committed USD 200

million to LaSalle Property Fund, a core

fund targeting retail, office, residential andlogistics properties in the US.

Municipal Employees Annuity & Benefit

Fund of Chicago makes additional USD

50 million allocation to core real estate

The USD 4.7 billion Municipal Employees

Annuity & Benefit Fund of Chicago

(MEA&B) has committed an additional

USD 25 million to AFL-CIO Building

Investment Trust and a further USD 25

million to American Core Realty Fund.Both vehicles are open-ended core

funds investing in the US. It had initially

committed USD 15 million to each vehicle.

The pension fund has a target allocation

of 10% to real estate and currently has

around 4.7% allocated to the asset class.

Data Source:

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Forena Akthar takes a look at the latest real estate investor news.

Real Estate Spotlight October 2010

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Transcript of Real Estate Spotlight October 2010