Real estate investors prepare for distress, but opportunities lag
Capital is piling into opportunistic real estate funds playing a waiting game
The global health crisis has piqued real estate investors’ appetite for bargains.
Capital raised for closed-end distressed fund strategies accounted for 17 percent of total real estate fundraising in the first quarter, according to Preqin data.
Over one third of the US$363.8 billion existing dry powder for real estate is sitting in either opportunistic or distressed funds.
But while some markets and sectors currently offer discounts, there’s no sign of the type of distress experienced after the 2008 financial crisis. This has resulted in a gap between the prices owners are willing to part with assets for, and what investors are willing to pay.
“Investment vehicles that are able and willing to invest directly in real estate assets or debt, as well as companies, are clearly having no difficulty in attracting capital,” says Christian Denny, EMEA capital markets research & strategy director at JLL. “But the compelling opportunities those funds are seeking for now remain limited.”
It may just be a matter of time before the gap closes. There is “significant” stock of distressed real estate assets out there, Real Capital Analytics said in a recent note.
Assets in waiting
There’s clearly conviction among some investors that the pandemic will have a major impact on commercial real estate. Oaktree Capital Management recently raised US$4.7 billion for its eighth opportunistic global real estate fund.
Toronto-based Brookfield Asset Management is looking to raise US$17 billion for its largest-ever global opportunistic fund. Cerberus Capital Management has US$2.8 billion committed to its global opportunistic real estate strategy, Cerberus Institutional Real Estate Partners V.
However, a combination of supportive monetary policy and very few bankruptcies means no starting gun has been fired, says Nick Ridgewell, funds advisor director at JLL, despite uncertainty experienced to varying degrees by the retail, office and hotel sectors.
“Loans are being extended, but how long that remains the case is up for debate,” he says. “There’s been less urgency and more dialogue than we saw in the global financial crisis in 2008.”
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The stand-off between buyers and sellers looks set to remain an issue for the time being, Ridgewell says. A lot comes down to price discovery.
“That will first need to be solved before we see significant market movement and can then truly label deals distressed, or discounted,” he says.
In the U.S., there are signs that working it out, rather than a shake out, is for now the way forward. In the first quarter of 2021, the amount of commercial real estate distress that was worked out eclipsed the level of new distress arising, according to Real Capital Analytics.
While the pandemic has seen investors turn to core investments for resiliency of income, investors in the U.S. are currently pursuing a barbell approach, balancing core strategies with opportunistic or distressed strategies. The aim is to capitalize on dislocations.
“A lack of suitable deals is leading to frustrated and under-deployed capital,” Denny says.
But as real estate developers, investors and lenders face growing liquidity needs, capital may no longer be playing a waiting game.
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