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Property Supply Hasn’t Kept Pace With Popularity of Real-Estate Funds

Europe’s largest property markets—the U.K., Germany and France—have seen the steepest declines in commercialproperty investment. Above, pedestrians leaving a shopping center last summer use an escalator in front of a building under development in London. PHOTO: DANIEL LEAL-OLIVAS/AFP/GETTY IMAGES

Europe’s largest property markets—the U.K., Germany and France—have seen the steepest declines in commercial property investment. Above, pedestrians leaving a shopping center last summer use an escalator in front of a building under development in London.

PHOTO: DANIEL LEAL-OLIVAS/AFP/GETTY IMAGES

By ART PATNAUDE of the Wall Street Journal

Investors are piling money into real-estate funds—but fund managers are finding it a challenge to spend it.
Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.
Real-estate funds are one way investors can bet on the property market without having to buy a whole building. When an investor commits capital to a fund, whatever amount remains unspent is known as dry powder.
The record level of dry powder comes as investors increasingly have turned to commercial real estate in a hunt for returns. Ultralow interest rates at global central banks have made returns on offices and shopping malls look attractive compared with other asset classes such as bonds.
Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2005 and 2008 in the run-up to the global financial crisis, Preqin said.
This level of fundraising “reflects the sustained institutional appetite for real estate,” said Andrew Moylan, head of real estate products at Preqin.
But the amount of property for sale hasn’t kept pace with the rising level of demand, a big reason for the for the accumulation of dry powder, analysts said.
With competition for deals fierce, “it has been much more challenging to invest,” said Don Rowlands, head of real estate in the U.S., Europe, the Middle East and Africa for the London-based law firm Herbert Smith Freehills.
One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.
After Britain voted to leave the European Union, international investors circled London waiting for bargains. But even there, only a handful of discounted deals emerged.
“There are very few forced sellers,” said Guy Grainger, chief executive of the Europe, Middle East and Africa region at Chicago-based property broker JLL.
Commercial-property-investment volumes boomed in recent years as investors hunted for returns greater than the rock-bottom yields offered by government bonds. But last year, the €234.5 billion ($248.6 billion) of deals in Europe was down about 27% from 2015, according to data from deal tracker Real Capital Analytics.
Europe’s largest property markets—the U.K., Germany and France—saw the steepest declines. In the U.K. last year, deal volumes dropped 48% from 2015, Real Capital said. Caution over politics, including the U.S. election, Brexit and a spate of European elections set for this year, has been part of the drop off in deals, analysts said. But a major reason, according to analysts, is the lack of assets to buy.
Another factor in landlords’ reluctance to sell: potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.
“The idea is that it makes financial sense to just hold on a bit longer,” Mr. Grainger said. The large amount of capital on hand with which to invest in commercial property has been a big factor in driving commercial-property values higher. Global cities, such as New York, London and Paris, have been a focal point for return-hungry investors.
In London, for instance, the capitalization rate—a measure of property yield—for offices fell to 4.6% in the fourth quarter of 2016 from 7.3% in late 2009, according to Real Capital.
Some property chiefs and analysts have been warning that real-estate values in some markets, including major global cities, look overheated.
“People are investing in real estate for the yield and return,” JLL’s Mr. Grainger said. “There is a danger they aren’t necessarily always looking at the fundamentals.”
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