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Europe: A wall of capital

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Preqin examines the recent surge in European fundraising, including the growth of debt and distressed strategies and the increasing flow of international capital into the region.

European fundraising has improved dramatically over the last year, reflecting growing investor appetite for the region. Almost 90% of Europe-based fund managers believe that investor appetite has increased over the past year, with none stating they have seen a decrease in appetite. This has led to a large amount of capital focusing on Europe, and while transaction volumes are up, pricing is becoming competitive and it is now harder to find attractively priced assets, particularly in the major markets in the UK and Germany.
 
Record Dry Powder
 
The European private real estate market has grown considerably, with a total of €21bn raised by 28 funds reaching a final close in 2014 so far, already far exceeding the €11bn raised by 37 funds closed in the whole of 2013. This represents the largest amount of capital raised by Europe-focused funds since 2007, demonstrating an overwhelming growth of confidence in the real estate market in the region.
 
Europe has accounted for 44% of aggregate capital raised by private real estate funds in 2014 so far, an increase from 2013 when the region represented just 17% of total capital raised.  Correspondingly, the proportion of aggregate capital raised focusing on North America has declined from 68% in 2013 to 49% in 2014 so far. As a result of the significant growth in European fundraising over the past 12 months, dry powder for Europe-focused funds currently stands at an all-time high of €52bn – a 44% increase on December 2013. In comparison, dry powder for North America-focused funds has risen from €84bn to €89bn, an increase of just 6%.
 
Many fund managers raising Europe-focused funds are also exceeding their target size, with 62% of funds focusing on Europe closed in 2013 to 2014 so far having reached a final close above their initial target size. In comparison, 39% of North America-focused funds have exceeded their target size, with 45% closing below target.
 
Key Strategies
 
Funds focusing on opportunistic investments in Europe have raised the most capital for the region in 2014 so far, with 10 such funds closed raising a total of €6.9bn. Distressed funds also raised a relatively notable amount of capital, with €5.4bn raised by just two funds. Seven debt funds have closed raising €3.8bn, representing a record amount of capital raised by the strategy in Europe. Four of the top 10 Europe-focused funds closed so far in 2014 focus solely on debt investments, with a further two funds including the strategy within their remit.
 
The strength of the European fundraising market is further highlighted by the fact that Europe-focused funds closed in 2014 have, on average, spent less time in market than North America-focused funds, at 16 months compared to 19 months. In comparison, in both 2011 and 2012, funds focusing on European investments spent an average of 20 months on the road, compared to 18 months for North America-focused funds, demonstrating that managers are increasingly able to reach a final close more quickly when raising funds focusing on European investments.
 
International Capital Flowing into Europe
 
A particularly notable trend seen over the last 12 months is the increasing prominence of international players raising Europe-focused funds. Over half (55%) of the aggregate capital raised in 2014 so far has been by managers based outside Europe – the highest proportion since 2008. From 2009 to 2010, a retreat of international managers from the European fundraising market is particularly evident, with the proportion of aggregate capital raised by these managers decreasing from 36% to just 2% over this time period. The recent growth in Europe-focused fundraising by managers based outside the region demonstrates the positivity felt by these managers regarding European real estate opportunities.
 
Also notable is the return of many of the largest US private equity giants to Europe. The largest private real estate fund to close in 2014 to date, Lone Star Fund IX, raised $7.2bn and focuses 50% of its capital on Europe, targeting non-performing and sub-performing single-family residential real estate debt. Blackstone Group has recently announced it is reopening Blackstone Real Estate Partners Europe IV, already the largest ever solely Europe-focused private real estate fund, for existing investors, with the target of raising an additional €1.5bn. JP Morgan Asset Management has started marketing the opportunistic JP Morgan European IP Fund III, while the likes of Starwood Capital Group, Rockpoint Group and Westbrook Partners are all marketing large offerings which will allocate a portion of their capital to Europe.
 
Outlook
 
Looking ahead, investor appetite for European real estate investments looks to remain strong; the proportion of institutions targeting European investments has increased for investors based in Europe, North America and Asia. Seventy-six percent of Europe-based institutions plan to invest domestically in the next 12 months, compared to 59% which stated so in 2013. Fifty-two percent and 25% of Asia- and North America-based investors respectively are also planning to invest in the region over the next year, demonstrating the global pull of European real estate.
 
However, capital is likely to remain concentrated among larger, more experienced managers, as many investors remain focused on firms with a proven strong track record. Standing out from the crowd is consequently still very difficult for managers, meaning that those without a prior track record to demonstrate to investors will need to be able to successfully articulate how they are best placed to find value in the current market.
 
The two largest Europe-focused funds in market, Hermes Real Estate Senior Debt Fund and AgFe Real Estate Senior Debt Floating Rate Fund, will both focus solely on debt investments, demonstrating the continued prominence of the strategy in Europe, though with banks increasingly back in the market, debt funds are finding the market more competitive. This will also be the case for equity investors, as the record dry powder held by private fund managers, as well as more interest in Europe from other players, may continue to push up prices in the coming year. 
 
This is an excerpt from Real Estate Spotlight – November 2014. To download the full report, click here.

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