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Forget What You Heard: The Wall Of Capital Targeting Real Estate May Not Actually Be That Big


Stick “real estate wall of capital” into Google and you find plenty of studies and articles saying there is a ton of money looking to invest in the real estate sector, which will help to support asset prices.

The amount of “dry powder” — equity raised but not spent — held by private equity funds and institutional investors’ desire to increase allocations to real estate are normally cited.

But one research firm isn’t buying it. In a new note, “About That Wall…” Green Street Advisors says the amount of equity targeting the sector is not as big as is often made out. If it was, growth in transaction volumes and asset values would have been stronger over the past three years, it said.

“Conventional wisdom dictates that an unprecedented amount of equity dry powder is poised to be deployed into the transaction market,” the company said.

“This wall of capital is thought to be supportive of values on both sides of the Atlantic and a foreshadower of M&A, including REIT privatisations. So why has the growth in transaction volume and asset values in the U.S. and Europe been tepid in recent years?”

Green Street argued that the focus on dry powder ignores the fact that as closed-ended vehicles, private equity firms are constantly giving money back as well as taking it in, and when this factor has been accounted for, they have actually seen net outflows in recent years. The amount of capital flowing into open-ended funds has also slowed, it said.

It added that the dominance of what it calls the Killer B's, Blackstone and Brookfield, has grown, with the two firms accounting a big chunk of all private equity fundraising and REIT privatisation activity between 2010 and 2019. They will continue to dominate the world of REIT acquisitions as the cycle evolves.

Green Street said institutional investors might be close to reaching their target allocations, which will slow the amount of new equity coming into the sector.

The fact that pricing is high and the cycle might be turning won’t necessarily stop fund managers’ spending, it said.

“The consensus views are that valuations are full, this cycle is long in the tooth, and interest rates may rise,” it said. “But economic incentives tend to win out. Many closed-end fund managers collect fees on committed capital, but this income stream is peanuts compared to the amounts earned from investing the capital.”

It ended its analysis with a cheeky analogy to another wall that is hitting the headlines in a different way.

“Conventional wisdom puts the wall as a 10-foot thick, concrete-reinforced barrier standing $5.7B tall, when in reality it measures, say, just $1.4B. Therefore, property investors are advised to ratchet back their level of exuberance over the potential boost to asset values. Rather, they should take heed of the signal from the broader capital markets, which suggests that commercial real estate is fairly priced.”