The secondary market for real estate investments, which grew
30% in 2014 after years of being nearly dormant, is poised to grow 45% this
year to up to $7 billion, observers say. With several $1 billion or larger
portfolios of limited partnership interests in real estate funds for sale —
including CalPERS' plans to sell up to $3 billion of its real estate portfolio
— the market appears ready for prime time.
Based on completed transactions, the market grew 30% to $4.8
billion in 2014 from the prior year. That compares with $2 billion in completed
deals in 2011, according to data from Landmark Partners, an alternative
investments manager that specializes in investments on the secondary market.
Landmark predicts “record growth” in 2015, to the $6 billion to $7 billion
range.
During the past five years, there were about three secondary
real estate transactions of $400 million or more, he said. So far this year,
there have been six transactions in that range, of which several were larger
than $1 billion, Mr. Sunday said. The growth of the real estate secondary
market helped entice CalPERS to put a portion of its portfolio on the market,
spokesman Joe D'Anda said in an e-mail.
Respondents to a recent survey by Toronto-based secondary
market broker Setter Capital predicted the real estate secondary market could
reach $7.7 billion in 2015. Setter conducted the survey of the most active
buyers in the secondary market for alternative investment funds in January. While
there are only a handful of buyers, they have or are raising substantial
amounts. That interest, coupled with the fact that there are a limited number
of large portfolios for sale, has pushed prices up. And rising prices are
inducing other asset owners to return to the market.
Landmark Partners
fund
In May, Landmark Partners closed its latest real
estate secondary market fund, Landmark Real Estate Fund VII, at $1.6 billion,
exceeding its $1 billion target and the $718 million raised by its prior fund
in 2010. Landmark is not alone. Morgan Stanley Alternative Investment
Partners raised a $500 million fund this year.
The combined $2.1 billion raised as of July 1 is closing in
on the $2.3 billion of total capital raised by three funds in all of 2014,
according to London-based alternative investments research firm Preqin. Those
three funds are managed by Partners Group, Aberdeen Asset Management PLC
and Obligo Investment Management.
That's a big change for the secondary market for real estate
investments. For years, secondary managers spoke of the promise of the
secondary market for limited partnership interests in real estate as well as
the market's potential to aid rebalancing and provide liquidity. But the market
floundered, as there were few investors willing to sell portfolios at a
substantial discount, especially after the financial crisis.
Small firms dwindle
Several of the small number of managers investing on the
real estate secondary market ended up either closing or being swallowed up by
larger firms, which continued the business.
In 2014, StepStone bought San Francisco-based real estate
secondary market firm Clairvue Capital Partners. A year earlier, Carlyle Group
LP acquired Metropolitan Real Estate Equity Management LLC and The Blackstone
Group LP acquired Credit Suisse Group's secondary market real estate business.
These firms have been joined by new entrants including Goldman Sachs Asset
Management and North Star Real Estate Group.
Many of these managers are raising additional capital for
the real estate secondary market. For example, Blackstone Group has targeted $1
billion for its new real estate secondary market fund. LGT Capital Partners'
real estate subsidiary, LGT Clerestory LLC, and Carlyle Group also are raising
new real estate secondary market funds. LGT Clerestory is raising three funds,
each with approximately $400 million targets, according to document filed with
the Securities and Exchange Commission. The target for the Carlyle fund could
not be learned.
Increased number of
sellers
Landmark's Mr. Sunday said the “significant uptick” in
sellers comes from the trend of asset owners pruning their real estate manager
relationships. Some pension funds, endowments and foundations are looking to
resculpt their portfolios by reducing the number of GP relationships. When CalPERS announced its potential sale in
June, Paul Mouchakkaa, senior investment officer for real assets, said in a
news release that plan officials were selling “to reduce costs, risk and
complexity across the CalPERS fund.”
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