Real estate funds
Time to break their business archetypes
The global private equity real estate (PERE) market tells a tale of heightened real estate valuations and competition.
November 1, 2017
A blog post by Surabhi Kejriwal, Real Estate research leader, Deloitte Services LP.
The global private equity real estate (PERE) market tells a tale of heightened real estate valuations and competition:1
- At the beginning of the fourth quarter, there were 569 PERE funds in the market and 181 funds reached a final close in the first nine months of 2017. Of the 569 funds, more than 65 percent have been open for over 12 months.
- Dry powder swelled to $244 billion at the end of June, with 60 percent held by North American institutional investors. Fifty-three percent of investors acknowledged that it’s harder to find attractive opportunities, potentially due to high asset prices. Likewise, 75 percent of the respondents to the June 2017 Preqin survey of private real estate fund manager believe that it is more difficult to find attractive opportunities compared to a year ago. As such, the larger fund managers have reduced their targeted returns while smaller funds have increased theirs.
- As an asset class, the net asset value of PERE funds increased by 2.4 percent in the third quarter of 2016. Annualized returns were 11.9 percent between March 2014 and 2017.
Exploring investment strategies and niche assets
Now, PERE firms continue to explore different investment strategies and niche real estate assets to tide over the current market conditions and maximize returns. However, they have to take a harder look at their current operations and consider different ways to improve efficiency, create more value, and grow due to the increased competition. I have explored three potential areas below:
- Use technology for informed decision making: PERE firms should revisit their current investment decision approaches. For example, they should add the influence of disruptive technology to their property assessment criteria, as well as consider the degree to which commercial real estate owners themselves are adapting to these trends. The significant use of technology and increase in sensor-enabled buildings are increasing the availability of unconventional and more real-time demographic and unstructured data. PERE firms can consider using big data and predictive analytics to analyze these data sets to make more informed decisions.
Another technology worth considering is 3D-printed scale models that represent fully developed versions of currently under-construction buildings to provide an idea of the future landscape of the area.2 For instance, Tishman Speyer’s use of 3D-printed models for one of its construction projects helped the company better understand current and future development in San Francisco, and potentially add more rigor to its future investment decisions around location, building design, and construction.3
- Increase outsourcing to enhance transparency and productivity: Regulatory scrutiny has been increasing, and investors have become more demanding. In particular, both regulators and investors expect greater transparency and reporting from PERE funds. There is also a general sense that fund managers are spending more time on noncore tasks. As such, many limited partners and investors are also seeking frequent, granular, and sophisticated fund details as part of the due diligence process.4
This requires firms to have appropriate and robust fund administration processes, including reporting and accounting. Research suggests that PERE firms are less likely than other alternative investors, such as hedge funds, to have or use fund administration.5 Given the specialized needs, costs, and time commitment involved in managing the front- and back-office functions, PERE firms can consider outsourcing many of these activities to specialists that have the appropriate expertise, technology, people, and processes.6 This will allow them to be more transparent and productive, as they can focus on their core fund-related activities.
- Use innovative marketing techniques to create a digital experience: As highlighted earlier, PERE firms are taking longer to close funds and the number of open funds continues to increase. Consider this: The Preqin Investor Outlook: Alternative Assets H1 2017 suggests that PERE investors source funds predominantly through a mix of internal and external recommendations.7 Fifty-three percent of the PERE investors believe that they get insufficient information on the fund’s track record, while 55 percent believe the same about the fund’s strategy.8 Further, PERE firms are also likely to face competition from fintech startups that are offering individuals and institutional investors direct investment opportunities. These fintech firms are doing so with innovative solutions and enhanced user experiences at a relatively lower cost and faster pace, and with a user-friendly environment.
PERE firms should consider different approaches and also increase the frequency of communication with investors through the lifecycle of a fund, i.e. from the time it is opened till exit. Along with frequent, tailored, and timely communication, PERE firms should evaluate the channel and content.9 A combination of in-person and online investor outreach programs could help, as well as the latest analytical and visualization tools to provide and present investment insights, respectively. For this, PERE firms can consider outsourcing or investing in technologies to consistently measure and analyze the company and market performance, and possibly enhance their forecasting ability.
In general, investors appear to be confident about PERE firms’ abilities to meet defined fund objectives. But it’s a rapidly changing world, with increasing competition that makes the search for value even harder. PERE firms need to respond by rethinking everything they do. It is imperative for companies to evaluate their internal processes and recognize different uses of technology. Thereafter, they should identify activities for outsourcing, considering the regulatory, scalability, and cost factors. Ultimately, PERE firms need to ask themselves if they are doing what they should be doing. What do you think? Are you?
In general, investors appear to be confident about PERE firms’ abilities to meet defined fund objectives. But it’s a rapidly changing world, with increasing competition that makes the search for value even harder. PERE firms need to respond by rethinking everything they do.
1 The market statistics are sourced from: “Preqin Quarterly Update: Real Estate Q3 2017”, October 2017, “Preqin Quarterly Update: Real Estate Q2 2017”, July 2017; “Preqin Investor Outlook: Alternate Assets, H1 2017”, “Preqin Special Report: Real Estate Fund Manager Outlook, H2 2017”, July 2017, all Preqin.
2 Surabhi Kejriwal, Saurabh Mahajan, and Neeraj Sahjwani, “Innovations in Commercial Real Estate: Preparing for the City of the Future”, Deloitte, October 2016.
3 “Unveiling the Largest-Ever 3D-Printed Model of San Francisco,” Autodesk, May 28, 2014. “Stratasys 3D Printing Gives Architects Finer Details and More Display Options for 2017 San Francisco Skyline,” Stratasys Blog, October 11, 2014
4 “Private Equity: Why should GPs outsource fund administration?”, Apex Fund Services YouTube video, accessed on October 18, 2017.
5 Chris Andarca, “Top 3 Reasons Why Private Equity & Real Estate Funds Will Need Fund Administrators In 2017”, SeekingAlpha, December 2, 2016.
7 “Preqin Investor Outlook: Alternate Assets, H1 2017”, Preqin.
9 Surabhi Kejriwal, Saurabh Mahajan, and Neeraj Sahjwani, “2018 Real Estate Outlook: Optimize opportunities in an ever-changing environment”, Deloitte, October 2017.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.
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