PREQIN QUARTERLY UPDATE: REAL ESTATE Q3 2017...Q1 2012 - Q3 2017 $20bn in aggregate capital was raised by closed-end private real estate funds closed in Q3 2017. 65% of aggregate capital

PREQIN QUARTERLY UPDATE:

REAL ESTATE

Q3 2017Insight on the quarter from the leading provider of alternative assets data

alternative assets. intelligent data.

Content includes:

FundraisingFunds in MarketDeals Institutional Investors Dry Powder Fund Performance

© Preqin Ltd. 2017 / www.preqin.com2

PREQIN QUARTERLY UPDATE: REAL ESTATE, Q3 2017

FOREWORD - Oliver Senchal, Preqin

Over the past few quarters, real estate fundraising has struggled to remain consistent, and 2017 is on course to see one of the lowest totals in the past fi ve years. The number of funds closed in Q3 was a little more than half that seen in Q2, and aggregate capital

raised in the quarter is following a similar trend of decline. Europe-focused fundraising has suff ered especially this quarter, with the number of funds closed plummeting, and the aggregate capital secured also declining.

Although fewer funds are closing now than in previous years, the average fund size is growing – in fact, at $618mn, Q3 2017 has the second highest average fund size ever recorded. The average net asset values of properties held in closed-end funds have risen for the 27th consecutive quarter, which is helping fund managers to justify larger fund sizes. Though, this will do little to dispel the concerns around higher asset pricing, which have been echoed by both fund managers and institutional investors.

Strong performance, however, continues to contribute to the high level of investor satisfaction with the asset class. If fundraising is to pick up in Q4 – typically the period of most activity in the year for real estate fund managers – fi rms will need to demonstrate their ability to source attractive investment opportunities, at a time when many are starting to question whether we have reached the top of the market. Doing so will be a challenge, with a record number of vehicles for investors to choose from in the market today.

We hope that you fi nd this report useful and welcome any feedback you have. For more information, please visit www.preqin.com or contact [email protected].

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All rights reserved. The entire contents of Preqin Quarterly Update: Real Estate, Q3 2017 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Quarterly Update: Real Estate, Q3 2017 is for information purposes only and does not constitute and should not be construed as a solicitation or other off er, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Quarterly Update: Real Estate, Q3 2017. While reasonable eff orts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Quarterly Update: Real Estate, Q3 2017 are accurate, reliable, up-to-date or complete. Although every reasonable eff ort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Quarterly Update: Real Estate, Q3 2017 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.

p3 Fundraising

p5 Funds in Market

p6 Deals

p9 Institutional Investors

p10 Dry Powder

p11 Fund Performance

3

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FUNDRAISING

Private real estate fundraising declined in Q3, with 38 funds reaching a fi nal close, securing an aggregate $20bn, a 41%

decrease in capital raised from the previous quarter (Fig. 1). Quarterly fundraising in Q3 2017 is at its lowest level since Q1 2013 ($10bn), and the number of funds closed at its lowest quarterly level in over seven years.

As in the previous quarter, opportunistic funds raised the largest share of aggregate capital in Q3, despite fewer fund closures than value added (13) and debt funds (8, Fig. 2). This was largely driven by the $4bn close of Carlyle Realty Partners VIII in July 2017, an opportunistic vehicle that targets offi ce, residential, senior living, hotel and retail properties across the US market.

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Source: Preqin Real Estate Online

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Fig. 2: Closed-End Private Real Estate Fundraising in Q3 2017 by Primary Strategy

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Fig. 3: Closed-End Private Real Estate Fundraising in Q3 2017 by Primary Geographic Focus

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2012 2013 2014 2015 2016 2017

No. of Funds Closed Aggregate Capital Raised ($bn)


Date of Final Close

Fig. 1: Closed-End Private Real Estate Fundraising, Q1 2012 - Q3 2017

$20bnin aggregate capital was raised

by closed-end private real estate funds closed in Q3 2017.

65%of aggregate capital raised by funds closed this quarter was

secured by North America-focused funds.

61%of capital raised in Q3 2017 was accounted for by value added

and opportunistic funds.

$4bnwas raised by Carlyle Realty

Partners VIII, the largest fund closed in the quarter.

KEY FACTS



Fig. 6: 10 Largest Private Real Estate Funds Closed in Q3 2017

Fund FirmFund Size

(mn)Strategy Geographic Focus

Carlyle Realty Partners VIII Carlyle Group 4,000 USD Opportunistic US

Secured Capital Real Estate Partners VI PAG Real Estate 1,900 USD Debt, Distressed, Opportunistic Asia

CRE Senior 10 AXA Investment Managers – Real Assets 1,500 EUR Debt Europe, North America

H/2 Special Opportunities IV H/2 Capital Partners 1,587 USD Debt North America, West Europe

DivcoWest Fund V DivcoWest 1,585 USD Value Added North America

Oak Street Real Estate Capital Fund IV Oak Street Real Estate Capital 1,250 USD Core-Plus, Value Added US

Cabot Industrial Value Fund V Cabot Properties 775 USD Value Added UK, US

Stabilis Fund V Stabilis Capital Management 525 USD Debt US

Capman Nordic Real Estate Fund II CapMan Real Estate 425 EUR Value Added Nordics

ICG-Longbow UK CRE Senior Debt Programme Vintage III ICG-Longbow 370 GBP Debt Europe


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2012 2013 2014 2015 2016 2017YTD


Aver

age

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e Sp

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arke

t (M

onth

s)

Fig. 4: Average Time Spent in Market by Closed-End Private Real Estate Funds, 2012 - 2017 YTD

Year of Final Close

13% 11% 9% 6% 9% 7%

36% 34% 36% 39% 34% 40%

14%14% 17% 23%

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125% or More

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Prop

ortio

n of

Fun

dsFig. 5: Closed-End Private Real Estate Funds by Proportion of Target Size Achieved, 2012 - 2017 YTD

Year of Final Close

The decline in fundraising in Q3 compared to the previous quarter is largely due to lower levels of higher-risk fundraising. The number of opportunistic and value added funds reaching a fi nal close declined from 48 in Q2 2017 to 20 in Q3, and aggregate capital raised fell from $24bn to $13bn respectively. Core and core-plus funds have had a relatively successful quarter for fundraising, with seven funds reaching a fi nal close for an aggregate $2.4bn, compared to eight funds securing $850mn in Q2 2017.

While the decline in North America-focused fundraising was slight, for Europe-focused fundraising it was drastic: the number of funds reaching a fi nal close fell from 19 in Q2 2017 to 10 in Q3, with the

aggregate capital raised declining from $16bn to $4.6bn. Notably, Asia-focused fundraising improved in Q3 2017, with fi ve funds focused on the region securing an aggregate $2.6bn. In Q2 2017, only three Asia-focused funds held a fi nal close, raising a combined $40mn.

The amount of time spent in market by real estate funds has remained stable since 2014, at an average of 18 months (Fig. 4). Fundraising in 2017 is proving tougher than in 2016, with only 53% of funds closed in the year so far achieving or exceeding their target size (Fig. 5). However, the proportion of funds that reached a fi nal close in 2017 so far that achieved less than 50% of their target is lower than in 2016. In Q3, fundraising has been relatively successful for those reaching a fi nal close: 78% of funds closed have met or exceeded their target, with a signifi cant 30% securing 125% or more of their target size.

The amount of capital raised fell 41% between Q2 and Q3 2017

5


FUNDS IN MARKET

At the start of Q4 2017, there are a record 569 private real estate funds in market, collectively seeking $185bn in investor capital

(Fig. 7). This represents a 2% increase in the number of funds raising capital, and a 5% ($8.3bn) rise in targeted capital from the previous quarter.

North America-focused vehicles continue to dominate the fundraising landscape: the majority (57%) of capital targeted is earmarked for investment in the region (Fig. 8). Such funds are seeking $106bn in institutional commitments, which is more than twice the total capital targeted by Europe-focused vehicles.

With increasing numbers of funds in market, competition for investor capital remains intense; nearly two-thirds (65%) of vehicles have been seeking capital for more than a year (Fig. 9).

Value added vehicles make up the largest proportion of both funds in market and aggregate capital targeted: 200 funds seek $58bn, including two of the fi ve largest vehicles on the road, Starwood Global Opportunity Fund XI and Brookfi eld Strategic Real Estate Partners III (Fig. 10).

Fig. 10: Five Largest Closed-End Private Real Estate Funds in Market

Fund FirmTarget Size

(mn)Strategy Geographic Focus

Starwood Global Opportunity Fund XI Starwood Capital Group 6,000 USD Debt, Distressed, Opportunistic, Value Added North America, Europe

Blackstone Real Estate Partners Asia II Blackstone Group 5,000 USD Opportunistic Asia, Australasia

Brookfi eld Strategic Real Estate Partners III Brookfi eld Property Group 4,000 USD Opportunistic, Value Added Global

PIMCO Bravo Fund III PIMCO 3,500 USD Debt, Distressed, Opportunistic North America, Europe

Brookfi eld Real Estate Finance Fund V Brookfi eld Property Group 3,000 USD Debt North America


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No. of Funds Raising Aggregate Capital Targeted ($bn)


Fig. 7: Closed-End Private Real Estate Funds in Market over Time, Q1 2013 - Q4 2017

15%25%

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ds

Fig. 9: Time Spent on the Road by Closed-End Private Real Estate Funds in Market

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Fig. 8: Closed-End Private Real Estate Funds in Market by Primary Geographic Focus



DEALS

The number of private equity real estate (PERE) deals completed continues to recover from the low seen in Q1 of

this year, with a total of 1,170 deals completed in Q3 (Fig. 11). However, deal value is 18% ($12bn) less than in Q2 2017, with $56bn worth of transactions completed in Q3. The rise in activity can mostly be attributed to the completion of smaller deals, with the proportion of completed deals valued at less than $50mn having increased by four percentage points over the quarter (Fig. 12).

Offi ce assets remain the most common property type, both in terms of the number of deals and value (Fig. 13). Residential acquisitions amounted to almost $16bn (28%) during Q3 2017, nearly double its share of aggregate value in the previous two quarters. However, over a quarter (27%) of residential deal value

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$1bn or More

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Prop

ortio

n of

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ls

Fig. 12: Private Equity Real Estate Deals by Value, Q1 2014 - Q3 2017

815

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No.

of D

eals

Fig. 11: Private Equity Real Estate Deals, Q1 2014 - Q3 2017

Aggregate Deal Value ($bn)

5% 6% 3%10%

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No. of Deals Aggregate Deal Value

Retail

Residential

OperatingCompanyOffice

Niche

Mixed-Use

Land

Industrial

Hotel


Fig. 13: Private Equity Real Estate Deals by Primary Asset Type, Q3 2016 vs. Q3 2017

Prop

ortio

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l

$56bnAggregate value of the 1,170

PERE deals completed in Q3 2017.

73%of capital was invested in

single-asset PERE deals in Q3, a 14-percentage-point increase

on Q2 2017.

28%The proportion of capital

allocated to residential PERE deals compared to 16% in

Q3 2016.

$3.8bn Aggregate value of the fi ve

largest single-asset PERE deals completed in Q3 2017.

KEY FACTS

7


16% 14%

36%27%

84% 86%

64%73%

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Q3 2016 Q3 2017 Q3 2016 Q3 2017


Single Asset

Portfolio


Fig. 15: Private Equity Real Estate Deals by Transaction Type, Q3 2016 vs. Q3 2017

Prop

ortio

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l

Fig. 17: Five Largest Portfolio Private Equity Real Estate Deals Completed in Q3 2017

Asset Asset Type Buyer(s) Seller(s)Deal Size

(mn)Location(s)

Deal

Date

Monogram Residential Trust Residential Greystar Real Estate Partners Monogram Residential Trust 3,000 USD US Jul-17

US, Diversifi ed Portfolio Offi ce Stonemont Financial Group Oak Street Real Estate Capital 1,300 USD US Sep-17

US, Residential Portfolio Residential Starlight Investments, Unidentifi ed Buyer(s) Unidentifi ed Seller(s) 1,300 USD US Jul-17

QHotel Portfolio Hotel Aprirose Real Estate Investment Bain Capital Credit, Canyon Partners Real Estate 525 GBP UK Sep-17

UK, Hotel Portfolio Hotel Henderson Park Capital Tonstate Group 500 GBP UK Aug-17


33% 35%

10% 14%

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28%28%

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Q3 2016 Q3 2017 Q3 2016 Q3 2017


500,000ft² or More

200,000-499,999ft²

100,000-199,999ft²

Less than 100,000ft²


Fig. 14: Private Equity Real Estate Deals by Asset Size,Q3 2016 vs. Q3 2017

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Fig. 16: Five Largest Single-Asset Private Equity Real Estate Deals Completed in Q3 2017

Asset Asset Type Buyer(s) Seller(s)Deal Size

(mn)Location

Deal

Date

Starrett City Residential Rockpoint Group, Unidentifi ed Buyer(s) Unidentifi ed Seller(s) 850 USD US Sep-17

Worldwide Plaza Mixed Use RXR Realty, SL Green Realty New York REIT 843 USD US Sep-17

Anting Town Development Site Land Vanke Unidentifi ed Seller(s) 745 USD China Sep-17

Wynyard Place Land AMP Capital Investors, UniSuper Brookfi eld Property Group 900 AUD Australia Sep-17

550 Washington Street Offi ce Oxford Properties Atlas Capital Group, Westbrook

Partners 700 USD US Sep-17


is attributed to just two deals: Greystar Real Estate Partners’ acquisition of Monogram Residential Trust, and Starlight Investments' acquisition of a US residential portfolio (Fig. 17).

Unsurprisingly given the increase in lower-value transactions, there has been a two-percentage-point increase from this time last year in the proportion of PERE deals where the asset is smaller than 100,000ft2 (Fig. 14). These smaller deals are also representing an increasing proportion of total deal value, up from 10% in Q3 2016 to 14% in Q3 2017.

The make-up of the number of deals by transaction type in Q3 2017 has remained relatively similar to Q3 2016 (Fig. 15). However, there has been a signifi cant 11-percentage-point drop in the proportion of aggregate deal value accounted for by portfolio deals.


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9


INSTITUTIONAL INVESTORS

Investor appetite for higher-risk strategies has cooled further in Q3 2017, with the proportion of investors targeting opportunistic

and value added real estate funds decreasing by six and fi ve percentage points respectively (Fig. 18). Real estate debt funds have grown in prominence over the year, with appetite from the institutional investor community increasing signifi cantly: 18% of investors sought these funds in Q3 2016 compared to 27% in Q3 2017. This may be an indication that investors are looking to diversify their real estate portfolios and move away from those strategies that have experienced high valuations in recent times.

Investors’ geographic preferences have not shifted as signifi cantly, as seen in Fig. 19. However, the proportion of investors targeting

North America-focused funds has decreased by eight percentage points from Q3 2016.

According to Preqin’s interviews with investors in June 2017, 26% of investors plan to allocate more capital to real estate in the next 12 months compared to the previous 12 months. Correspondingly, the proportion of investors looking to allocate $600mn or more has increased from 5% in Q3 2016 to 13% in Q3 2017 (Fig. 20).

There has been a decrease in the proportion of investors planning smaller commitments of less than $100mn, from 53% in Q3 2016 to 46%, and nearly two-thirds (64%) of investors expect to invest in one to three funds in the next 12 months (Fig. 21).

47%

53%

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Region Targeted

Fig. 19: Regions Targeted by Private Real Estate Investors in the Next 12 Months, Q3 2016 vs. Q3 2017

61%

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Fig. 18: Strategies Targeted by Private Real Estate Investors in the Next 12 Months, Q3 2016 vs. Q3 2017

Strategy Targeted

35% 33%

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Fig. 20: Amount of Capital Investors Plan to Commit to Private Real Estate Funds in the Next 12 Months, Q3 2016 vs. Q3 2017

23%

41%

29%

7%

1 Fund

2-3 Funds

4-9 Funds

10 Funds orMore


Fig. 21: Number of Private Real Estate Funds Investors Plan to Commit to in the Next 12 Months



DRY POWDER

Private real estate dry powder levels stand at $244bn as at September 2017 (Fig. 22); this is a modest decline of $9bn

since July, suggesting that fund managers have succeeded in putting capital to work over the past quarter. July was the pinnacle in terms of the level of dry powder, reaching $253bn (Fig. 23).

North America-focused funds account for the largest proportion (60%) of global dry powder, standing at $147bn in September 2017 (Fig. 24). The availability of capital for North American assets may also contribute to pushing valuations higher. Dry powder levels have increased slightly across all other regions since the end of 2016, although there has been a $4bn decrease in the amount

of Europe-focused capital available to deploy since June 2017.Opportunistic and value added funds continue to account for the largest amounts of industry dry powder, representing 41% and 24% respectively. Debt funds, which have rapidly risen in prominence in recent months, experienced a $4bn increase in dry powder from June to September 2017, and are the fastest growing strategy this year in terms of dry powder (Fig. 25). Dry powder has decreased for both core/core-plus and distressed funds, suggesting that more capital has been deployed through these strategies since the end of 2016.

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Fig. 24: Closed-End Private Real Estate Dry Powder by Fund Primary Geographic Focus, 2007 - 2017

165 168 176

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Fig. 22: Closed-End Private Real Estate Dry Powder, 2007 - 2017

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Fig. 25: Closed-End Private Real Estate Dry Powder by Strategy, 2007 - 2017

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Fig. 23: Monthly Closed-End Private Real Estate Dry Powder, January 2017 - September 2017

11


FUND PERFORMANCE

Closed-end private real estate has continued to deliver strong returns in recent quarters, with an average NAV increase of

2.4% at the start Q4 2016 – the most recent quarter for which data is available – marking 27 consecutive quarters of growth (Fig. 26). The PrEQIn Real Estate Index stands at 112.5 as of December 2016 (rebased to 100 as at December 2007), with all strategies increasing between Q3 and Q4 2016 (Fig. 27). The Real Estate Debt Index has grown the most in the quarter, increasing 8.7% to reach 146.8 points by the close of 2016.

Closed-end private real estate funds with recent vintages continue to deliver strong returns: 2014 vintage funds have a median net IRR of 12.1%, while the top-quartile boundary of the same vintage

is 18.4% (Fig. 28). These recent vintage funds may soon deliver higher net IRR performance as they realize assets in their portfolio and then benefi t from current high valuations (Fig. 28). Beyond this, there is still signifi cant unrealized value in older funds, which have the potential to bolster already high distributions to investors.

Core/core-plus funds delivered more consistent returns than the more volatile IRRs seen across other strategies. Value added funds of recent vintages have strong returns: 2014 vintage funds have delivered a median net IRR of 12.7%, outperforming all other strategies (Fig. 29).

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Fig. 28: Closed-End Private Real Estate Funds: Median Net IRRs and Quartile Boundaries by Vintage Year

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30%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Core/Core-Plus

Debt

Opportunistic

Value Added


Net

IRR

sinc

e In

cept

ion

Vintage Year

Fig. 29: Closed-End Private Real Estate Funds: Median Net IRRs by Strategy and Vintage Year

109.7

135.1

96.590.9

0

20

40

60

80

100

120

140

160

Dec

-07

Jun-

08D

ec-0

8Ju

n-09

Dec

-09

Jun-

10D

ec-1

0Ju

n-11

Dec

-11

Jun-

12D

ec-1

2Ju

n-13

Dec

-13

Jun-

14D

ec-1

4Ju

n-15

Dec

-15

Jun-

16D

ec-1

6

PrEQIn Real Estate PrEQIn Real Estate DebtPrEQIn Opportunistic PrEQIn Value Added


Inde

x Re

turn

(Reb

ased

to 1

00 a

s of

31-

Dec

-200

7)

Fig. 27: PrEQIn Index: Real Estate by Strategy, (Rebased to 100 as of 31 December 2007)

-0.4%

0.2%

4.0%

7.3%

4.5%

5.6%

1.5%

2.5%2.6%

2.3%1.9%

2.6%2.6%

1.7%

3.4%3.9%

1.3%

4.5%

1.9%

4.4%

2.4%2.3%

2.3%

3.8%2.8%

2.5%2.4%

2.4%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2010 2011 2012 2013 2014 2015 2016


Aver

age

Chan

ge in

NAV

from

Pr

evio

us Q

uart

er

Fig. 26: Closed-End Private Real Estate Quarterly Change in NAV, Q1 2010 - Q4 2016


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PREQIN QUARTERLY UPDATE: REAL ESTATE Q3 2017...Q1 2012 - Q3 2017 $20bn in aggregate capital was raised by closed-end private real estate funds closed in Q3 2017. 65% of aggregate capital