Real estate private equity builds on solid foundations in Q2

Private equity investment in real estate shot up sharply in Q2 2017, as dealmakers look to deploy dry powder in increasingly sizable deals

Private equity real estate deal value for Q2 2017, including exits, climbed four-fold on Q1 numbers to reach US$11.96 billion. Deal volume was up materially too, rising from five deals in Q1 to 14 deals in Q2. The strong performance makes Q2 2017 the highest-valued second quarter for private equity real estate deal value since the financial crisis.

The Q2 figures reflect a market that has been dominated by big ticket transactions such as French real estate group Gecina’s US$6.5 billion agreement to purchase Eurosic, Blackstone Group’s US$4.1 billion plan to buy out Finnish real estate leasing business Sponda Oyj, and Canada Pension Plan Investment Board’s US$1.5 billion agreement to acquire US real estate investment trust Parkway Properties from TPG Capital.

Yet the trends seen in this sector need to be viewed on a regional basis. Within European markets like Germany, real estate is still very much a pure yield play, while the US is looking a bit softer as interest rates creep up. This is reflected in the regional spread of deals. Of the US$11.96 billion spent across 14 deals in Q2, US$10.88 billion targeted Western European firms.

There is evidence that private equity real estate funds, in their quest for deals, are willing to take more risk to generate returns. According to Nick Duff, Head of Real Estate at Aon Hewitt, private equity sponsors are looking to deliver returns of 15% net and a multiple of around 1.6x for equity strategies, and around 8% or more for debt strategies.

“They are taking on a bit more risk and looking at deals where they can reposition or redevelop a property to increase occupancy and generate more upside,” Duff says.

Given Q2’s steep upward trajectory, it’s tantalizing to imagine that deal value in Q3 or Q4 might top the US$15.18 billion recorded in Q4 2014. The possibility may hinge on whether US PE firms continue their hunger for Western European targets or grow cautious—as some buyers have in other sectors—over the ongoing political instability overseas.

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