Has private equity fallen out of love with real estate?

by Steve Randall02 Aug 2018

Last year saw some new records being achieved for the aggregate value of private equity real estate deals.

But so far 2018 has seen moderation with the number of real estate deals involving private equity and their aggregate value, declining in both the first and second quarters.

Analysts at Preqin say that a total of 1,295 transactions were completed globally in Q2 with a combined value of $62bn, down from 1,623 deals worth a total of $77bn seen in Q1.

Despite the Q2 totals expected to rise by up to 10% as more information becomes available, the period remains some way off the record $102bn in deal making seen in Q4 2017.

North America accounted for 921 of the deals.

“Although private equity real estate deal activity has fallen for a second consecutive quarter in 2018, it doesn’t necessarily mean the industry should start to worry,” said Tom Carr, head of equity products. “Even if activity has fallen below levels seen through most of 2017, the first half of 2018 has still seen activity on par with levels recorded in 2016 and 2015.”

Residential deals accounted for a growing proportion of deal value over the past year: transactions for residential assets accounted for 15% of deal value in Q2 2017 but accounted for 27% in Q2 2018.

Although office assets continued to make up just over a quarter (27%) of transactions, they fell in deal value proportions, from 36% in Q2 2017 to 28% in Q2 2018.

“The majority of investors and fund managers surveyed by Preqin are concerned about valuations in the real estate deal market,” added Carr. “In response, fund managers might be shifting towards smaller deals; Q2 saw a significant rise in the proportion of total deal value deployed in transactions valued at less than $50mn.”

Carr added that there has also been a shift of capital being put to work in residential real estate which reflects investors’ view that that these assets provide some of the best opportunities currently.

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