PE real estate deals bounce back in Q1

Signs of a rebound follow last year’s pullback in private equity real estate deals

Real estate investment by private equity nosedived during 2020 due to the pandemic, as deal value collapsed. But now funds are finding value in niches such as tech-enabled buying platforms, logistics, student accommodation and life sciences.

Despite a rough 2020, ample stores of dry powder and a booming US housing market suggest that 2021 could well be a year of plenty for real estate PE deals.

After total annual deal value collapsed by 57% in 2020 compared to the previous year, to total US$18.1 billion, deal activity in the first quarter of 2021 has seen an uptick. Already in the first quarter of 2021, there have been 11 PE transactions in the real estate sector worth a combined US$7 billion—a 38% rise in volume and a 35% rise in value on Q1 2020.

Turning a corner

The largest of the deals in Q1 was US-based PE firm Starwood Capital Group’s US$5 billion acquisition of the remaining stake it did not own in CA Immobilien Anlagen, a listed Austrian real estate firm.

The return to form is likely to have momentum. Although there was a 43% year-on-year decrease in the number of new real estate PE funds closed, with total committed capital falling by 34% to US$118 billion, Preqin estimates that US$324 billion in dry powder rests in real estate-focused funds alone. The funds will not only continue to flow into growth areas such as tech platforms and logistics, but may also flow into core areas worst affected by the pandemic as part of a value recovery play.

The SPACs are coming

The ongoing frenzy of blank-check company IPOs has reached real estate, producing the sector’s largest deal of 2020 and doing so with a decidedly tech-centric flavor.

Venture capitalist Chamath Palihapitiya's Social Capital Hedosophia has launched a number of SPAC offerings seeking private tech assets to take public. One of these saw digital property portal Opendoor combine with the SPAC Social Capital Hedosophia Holdings Corp II in a merger valued at US$4.8 billion.

SPAC issuers have been capitalizing on the seemingly bottomless appetite among investors for high-growth tech assets—and the Opendoor deal is no different. Rather than owning hard assets, Opendoor serves the industry by enabling homeowners to quickly list and sell their homes on its digital market platform. In this sense the company is more tech and less real estate. It is expected that Opendoor will benefit from a US housing boom as buyers take advantage of rock-bottom interest rates.

Zillow, another digital property sales platform whose quarterly earnings for Q4 2020 beat analysts' expectations, has estimated that the US housing market gained nearly US$2.5 trillion in value in 2020, fueled by low interest rates and the desire to relocate, and forecasts that 2.5 million households could enter the market in 2021.

Even during the pandemic, real estate activity ticked up. Residential home sales in the US rose by 5.6% year on year in 2020, to 5.6 million, the highest number of homes sold since before the 2008 recession, according to the National Association of Realtors.

Warehouses, dorms, life sciences

Commercial real estate and physical retailing may have been buffeted by the pandemic; however, consumers continue to spend, intensifying PE interest in the logistics and warehouse space.

In February 2021, European-focused PE firm Equistone made a significant investment in UK-based logistics firm Ligentia, although the terms for the deal were not disclosed.

Equistone was not the only firm to demonstrate interest in this area—Blackstone announced a US$1.1 billion investment for a 70% stake in a 1.2 million-square-meter logistics park in Guangzhou, China in November 2020. The deal comes after Blackstone acquired the US logistics assets of Singapore-based GLP for US$13.4 billion in 2019—one of the largest-ever deals in the logistics industry by a PE firm.

Another segment of PE real estate that has demonstrated impressive resilience is UK student housing, in which the long-term fundamentals are compelling for investors. A shortage of quality accommodation combined with a demographic oversupply of university-age students and a post-Brexit government strategy to encourage foreign enrollments is driving funds' interest.

Blackstone bought iQ Student Accommodation for US$6 billion in February 2020, in what was billed as the UK's largest ever PE real estate deal. In February 2021, Ares Management inked a similar deal, spending £158 million for two purpose-built student housing properties. Ares announced that this maiden investment in the space is likely to be the first of many, with a target portfolio of up to £500 million.

Even life sciences is riding the PE real estate wave, as evidenced by Oaktree Capital Management’s November sale of Kadans Science Partner to AXA Investment Managers. The acquisition provides AXA with an opportunity to enter and build scale in the life sciences and lab offices sector which, according to industry magazine PERE, is booming thanks to the intersection of the COVID response and high occupancy rates in existing properties.

The price is REIT

Oaktree Capital Management co-founder and veteran investor Howard Marks said last year that real estate investment trusts (REITs) that hold high-quality office and retail assets, which were massively undervalued amid the crisis, were one of only a few buying opportunities available.

Private equity has spotted this opportunity. KKR signaled its faith in the staying power of central London office space by acquiring a 5.35% stake in Great Portland Estates towards the bottom of the market in September, when the trust was trading at around 40% below its net asset value. In the same month, Brookfield Asset Management increased its holding in British Land, also an office and retail REIT, to 9.23%, having staked an initial position of 7.31% earlier in the year.

REITs have seen their share prices improve as part of a broader market recovery. Standard & Poors estimates that the average discount to net asset value on US REITs narrowed to 5% by the beginning of December, from 16.7% only a month before. Nevertheless, there could still be plenty of upside on offer, given improving asset valuations.

With money to spend and a macro recovery now well in motion, PE is positioned to capitalize on these opportunities in 2021. Starwood Capital made the third-largest PE deal in the sector so far this year when it bought RDI REIT in a US$462 million take-private in February, having built a significant minority position in the trust during the first wave of the pandemic. And just this month, Starwood announced plans to acquire Invesco Office J-REIT through a takeover bid which values it at US$2.3 billion (including net debt), and to take the company private. If completed, the transaction would be the first takeover bid for a Japanese REIT with the end goal of delisting the REIT.


The real estate industry remains in flux at the start of Q2 2021. Housing markets are on the upswing and interest in warehouses remains high, but commercial and office properties could face continued difficulties as government support schemes end and long-term behavioral changes like flexible working become more evident.

With vast quantities of dry powder and nimble approach to dealmaking, PE is well-positioned to take advantage of both the upswing and turnaround opportunities.

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