Fewer opportunities to deploy capital in tough macro environment for real estate

SYDNEY, Dec. 1, 2023 /PRNewswire/ — Preqin, the global leader in alternative assets data, tools, and insights, published its Real Estate in Australia 2023 report. The report shows recent market conditions have created a challenging environment for global investors in real estate, also affecting those in Australia in terms of fundraising and capital deployment.

Global macroeconomic challenges impact the Australia-focused closed-end real estate sector

2023 has shaped up to be a year mired by market headwinds that has been driven by inflation, rising interest rates, and higher financing costs, as demonstrated by a slowdown in fundraising among real estate managers in Australia. Despite this, dry powder remains high meaning a possible indication of investors’ cautious deployment and fewer available opportunities.

Average fund sizes closed in 2022 and Q1 2023 in the sector were $204mn and $253mn respectively, much larger than the decade prior, where the average ranged from $28mn to $114mn. This trend highlights that as investors turn wary, they are choosing to commit capital with larger fund managers in a trend of consolidation. At the same time, amid higher market volatility, appetite for open-ended real estate funds has increased as they offer flexibility for commitments and redemptions, as well as due diligence processes that are more straightforward. They also allow a higher level of liquidity compared to closed-ended funds, attracting high-net-worth retail investors.

Deals data reveals office deals impacted by hybrid working arrangements  

Higher interest rates have resulted in a softer real estate market where sellers are holding on to assets or selling at discounts. In particular, the office asset type has been hard hit. The number of office deals have fallen yearly since 2021. By November 2023, only 22 deals have been concluded, with an aggregate value of $2.3bn, a sign that hybrid working arrangements are here to stay. This is a stark difference from 2019, when 114 office deals with an aggregate value of $16.6bn were concluded. 

Valerie Kor, lead author of the report at Preqin, says, “Real estate managers are struggling to raise and deploy capital in a tough macro environment driven by inflation, rising interest rates and higher financing costs. Bright spots can be found in real estate debt and value-added strategies, as well as in the student housing sector.” 

Additional report findings:

  • Fundraising: Closed-end private real estate fundraising came off its record high of $5.1bn in 2022, with 10 real estate funds raising an aggregate of $2.5bn.
  • Dry powder: Dry powder: Closed-end real estate dry powder stands at $12.6bn by the end of Q1 2023, up 75% in just three months. This trend is an indication of investors’ cautious deployment and fewer available opportunities.
  • Capital calls and distribution: For the first time since 2012, capital distributions have become negative at –$0.1bn, in the first quarter of 2023, while capital calls have also fallen to $1bn.