Private equity is raising property funding faster than it can be spent

Record US$289b is up 11% from a year earlier; 57% more than at end-2019

Dec 24, 2021

New York

(BLOOMBERG) PRIVATE equity real estate investors are raising money faster than they can spend it.

US funds have amassed a record US$287.8 billion for commercial-property deals, according to Preqin. That's up 11 per cent from a year earlier and 57 per cent more than at the end of 2019.

The pileup of capital affirms the bet that real estate's rally will continue while inflation rises, stocks wobble and bond returns lag - and despite new Covid-19 variants that could threaten a comeback for offices, hotels and malls.

US property investment volume is expected to rise by 5 per cent to 10 per cent next year as firms try to spend down their dry powder, according to CBRE Group.

Private equity giant Blackstone raised US$33.5 billion for real estate deals in the first three quarters of this year while deploying only US$25.3 billion. The challenge is that clients - pensions, endowments, high-net-worth individuals - are hungry for more.

"Investors view real estate as a safe place to be in an inflationary and low-rate environment," Nadeem Meghji, Blackstone's head of America's real estate, said in an interview.

The volume of cash chasing deals helped drive up US commercial-property prices an average of 18 per cent in the 12 months through November, led by a 22 per cent jump in warehouses and other industrial real estate, according to Real Capital Analytics.

An expected surge of distressed deals hasn't materialised, freezing deployment of more than US$91 billion in dry powder.

Sales have already set an annual record, with US$614 billion booked in the first 11 months of 2021, Real Capital data show. Some of the increase stems from pandemic-delayed deals that finally closed.

But many sellers also moved to reap profits. GTIS Partners unloaded US$1.6 billion of real estate this year and is routing capital to construct new single-family rental homes, apartments and warehouses, which can generate higher returns than existing buildings.

"Our trade is to sell old and build new," said Tom Shapiro, president of GTIS, a New York-based real estate investor with US$4.2 billion in assets. "Our focus is on putting money to work versus raising money."

While stepping up direct investment, private equity is also contributing to the record US$4 trillion of debt outstanding for real estate, lending as much as US$100 billion this year, according to the Mortgage Bankers Association.

The private equity money is funding construction, remodelling and other relatively short-term borrowing that's often too risky for banks, charging higher interest rates in exchange for more generous terms, such as greater loan-to-value ratios and no prepayment penalties.

"We are getting paid to take risks," said Warren de Haan, co-chief executive officer of Acore Capital. He expects to lend US$10 billion next year, up from US$7 billion in 2021.

So far, it's been hard to make bets far out on the risk spectrum. Acore announced a US$1 billion fund for hotel rescue financing in February but has only deployed US$200 million.

As the pandemic drags on and remote work becomes more acceptable, office buildings may be the next big target for investors seeking discounted properties.

Blackstone is targeting property types with higher demand than supply, based on demographic and technological trends - life-science labs instead of traditional offices; warehouses rather than malls.