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Brookfield Raises $14.5B For New Fund And Is Buying At ‘Unprecedented’ Yields

Mark Carney will chair Brookfield's new asset management company.

Brookfield Asset Management has raised $14.5B for its latest real estate opportunity fund, saying it sees great opportunities to buy assets at big discounts given its expectation the current turmoil in financial markets will pass sooner than others might think.

In second-quarter results released yesterday, Brookfield said it expected the Brookfield Strategic Real Estate Partners IV fund to close before the end of September. It began raising money for the fund last autumn, with a target of more than $17B of equity.

It will be the largest real estate fund Brookfield has raised, and it comes in the wake of Blackstone raising $20B for its latest opportunity fund last month. 

In a letter to Brookfield shareholders, chief executive Bruce Flatt said the current pullback of liquidity in stock markets and real estate markets was creating a good investment environment for the company. 

“We also made some great investments at very good valuations,” he said, including “$3B of real estate assets at large discounts to their tangible value and at unprecedented cash-on-cash yields”.

At the same time, Flatt said he did not expect the current declines in stock markets and caution among investors to persist for a long period. 

“Whether [the Federal Reserve raising interest rates] causes a recession is not important in our view, as balance sheets for individuals and companies are in a good position to withstand this shift, and before we know it, we expect to be in a recovery,” he said.

Flatt flagged up positive returns on previous Brookfield UK deals to illustrate why the company is confident of its ability to keep generating good returns from real estate. 

Over seven years, Brookfield built, developed and acquired student-housing properties in the UK that became the third-largest portfolio in the country. At 26,000 beds, Student Roost is an operating business created from the ground up that became a highly attractive asset for many buyers, he said.

Brookfield recently sold the business for £3.3B of enterprise value to GIC. It had invested £700M into the equity of this portfolio over time, and on closing later this year, it will generate cash from the investment of £1.8B to the equity. That should result in a gain of $1.6B or 2.7 times its investment, resulting in an internal rate of return of 25%. 

It also sold a property in the City of London, One London Wall Place, for £300M that it had built ground-up for a cost of £150M. Brookfield acquired its partner’s half pre-pandemic at a gross valuation of £270M. These transactions, in totality, generated an annualized internal rate of return of 18% and a 2.5x multiple of Brookfield’s equity capital. 

Down the street, while not a sale, Brookfield just completed the refinancing of 100 Bishopsgate, which is now fully completed and fully leased. It was built for £850M and Brookfield closed last month on a nonrecourse refinancing of £1.2B. It has now received cash distributions representing 100% of its equity plus a further £330M, while continuing to own 100% of it. To date, this has generated an internal rate of return of 19% and a multiple of equity capital of 2.9x. 

Brookfield Asset Management is currently in the process of splitting itself into two companies. One will retain the same name and manage the funds it raises, chaired by former Bank of England governor Mark Carney. The other will own its direct assets, including a portfolio of fully owned property assets valued at $62B and property joint ventures valued at $20B. The latter company will be called Brookfield Corporation. 

The biggest slices of those directly owned property assets are an office portfolio valued at $24B, incorporating 95M SF across 139 assets globally; and a retail portfolio valued $20B, comprising 112 U.S. malls totalling 112M SF. The rest is equity Brookfield has put into the funds it manages.

Results for the property portfolio released last week showed funds from operations from its office portfolio fell from $131M in the second quarter of 2021 to $95M in the second quarter of this year, primarily because of increased debt costs. 

Funds from operations for its retail portfolio rose from $103M to $188M, because fewer of its malls were closed due to Covid-19. It said it handed one mall back to lenders during the period to settle a $361M loan.