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Private real estate market continues to feed investor appetite

New entities fuel recovery, may create housing obstacles

Fundraising among private real estate investors continues to grow alongside investor appetite.

Over the past six months, private real estate funds looking to acquire assets, raised up to $39 billion, an increase of 56% from $25 billion in the same six-month period last year, according to analysis from Preqin.

Furthermore, so far this year, an aggregate $46 billion was raised by private real estate funds, up from $38 billion a year ago.

Nonetheless, the larger number of funds means the fundraising environment is expected to remain competitive for many fund managers, while attracting investor capital is still a very challenging prospect, explained Preqin head of real asset products Andrew Moylan.

"Although the average length of time that funds spend in market has seen a slight decline fundraising is a long process for many firms, with private real estate funds still spending on average over a year and a half on the fundraising trail," he said.

Investors find specifically residential, single-family real estate appealling due to a largely untapped market from an institutional investor standpoint, RealtyTrac said.

Historically, it has long been a sector dominated by mom-and-pop investors as well as small regional institutional investors.

However, institutional investors have slowly made their mark in the industry, with Brookfield Strategic Real Estate Partners raising $4.4 billion for a deal — the largest fund of the third quarter.

Blackstone Real Estate Debt Strategies followed suit, raising a total of $3.5 billion in investor capital, Preqin noted.

"The yields on single-family rentals are often higher than can be found on commercial or multi-family real estate, and on top of that there is the safety net of home price appreciation in this market that allows these institutional investors a profitable quick exit if they decide they don’t want to stick around long term," said RealtyTrac vice president Daren Blomquist.

In the third quarter, 81% of the capital raised by real estate funds was in North America, totaling $14.9 billion — a significant increase when compared to only $3.4 billion raised by funds focused on Europe.

Meanwhile, the average time taken for funds to reach a final close decreased from 19.8 months to 18.5 months for the first six months of 2013, Preqin pointed out.

The unprecedented involvement from institutional investors in the single-family real estate market is creating a new source of demand and supply that may impact the overall housing market in new ways, bringing a new dynamic to the space.

Having large chunks of properties controlled by a few large entities could become a primary driver of price appreciation. This can be good for the real estate recovery, but is a problem if home prices get out of sync with affordability levels, Blomquist explained.

"Down the road the new source of supply could result in an excess supply of inventory hitting the market, potentially weakening home prices, if these institutional owners don’t act responsibly in selling off their inventory," the RealtyTrac vice president concluded. 

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