Global private equity real estate deal flow declined in the first quarter of 2017, compared to 4Q 2016, according to Preqin data. Nearly 568 deals reflecting a combined total of $38 billion in assets were completed by the end of March, a 33% decrease in total deal size compared to the previous quarter. The aggregate deal value was the lowest recorded since the first quarter of 2014.
“Certainly, a climate of high valuations and intense competition are not aiding fund managers as they search for assets that offer the potential of outsized returns,” Andrew Moylan, head of real estate products at Preqin told CIO. “Furthermore, uncertain macro-economic conditions on either side of the Atlantic have seen many managers adopt a wait-and-see approach with the market still experiencing some volatility.”
While North America saw a downturn in deals, European deal flow was on the rise, with 205 transactions worth a combined $15 billion for the quarter. This was the highest aggregate total recorded since the end of the first quarter of 2016. About 63% of investors current consider Europe as offering the most attractive real estate investment opportunities.
In terms of sectors, office assets saw an uptick in demand, while capital committed to residential properties halved relative to the previous quarter. Value-added followed by opportunistic and distressed-oriented funds attracted the greatest amount of capital during the quarter.
Going forward, more than half of institional investors surveyed by Preqin expect to allocate $100 million or more to private real estate funds in the next 12 months. Nearly 57% plan to commit to at least four or more funds in this time period.
Moylan also remains bullish on investor appetite for private equity real estate.
“Private equity real estate fund managers currently hold a record $247 billion of dry powder, and two-thirds of those surveyed at the end of 2016 stated that they intended to increase their investment activity over the course of 2017,” he said.
“As such, it seems likely that deal flow will increase as the year progresses and managers continue to adapt to current market conditions. The obstacles that inhibited activity in Q1 will not disappear, but fund managers do still believe there are attractive opportunities in real estate, despite these challenges.”