CBRE'S SECONDARY TRADING VOLUMES IN REAL ESTATE FUNDS TOTAL A RECORD $2.43 BILLION IN 2016
Real estate secondary trading volumes reached a record total of $2.43 billion across CBRE’s global network in 2016, according to the latest market analysis from the global real estate advisor. A total of 187 fund interests were transferred over the course of the year, with transactions occurring in each of the three core global geographies: EMEA, APAC and the Americas. Whether measuring volume, trades or market participants, CBRE’s secondary market activity was up c.20% year on year.
According to CBRE, the growth witnessed in 2016 was driven by four primary factors. First, familiarity with secondary trading, whether in real estate or more generic private equity funds, is on the rise. Participation is increasing and for many the acquisition/disposition of risk through the secondary market is now the preferred route to liquidity. Second, investors are more frequently opting to determine for themselves, when they want capital deployed and when they want it returned. They are opting for certainty over time and price, and increasingly insisting on best execution, luxuries only the secondary market can provide. Thirdly, the ability to execute in size and at an efficient cost is fundamental to the growth of any market. All new markets either start with small tickets or large corporate finance offerings. As markets mature and dedicated brokerage services evolve, the ability to do size increases and execution becomes more cost efficient. The majority of growth witnessed this year came from individual fund trades of over $50m, accounting for approximately 30% of total volume. Finally, the industry is now far more transparent than it was ten years ago, meaning an investor can be more confident that they are executing “at market,” which in itself stimulates activity.
Price was varied over the course of the year, with CBRE trades executed between a 25% discount and a 6.5% premium to NAV, depending on the property markets to which the fund was exposed, the capital structure of the fund, and the proximity of return on both income and capital. However, on balance, highest pricing was secured in alternative sectors such as residential and student housing, as well as industrial and logistics. These were perceived by investors as defensive strategies when compared to the more vulnerable mainstream commercial market. The core European funds also performed well. Weaker pricing was evident in more traditional retail and London office strategies.
Secondary trades in real estate funds are hard to track, particularly on a global scale, due to sheer volume of capital deployed in real estate funds. Furthermore, the definition of what constitutes a secondary is far from consistent. Consequently, CBRE only ever publishes its own secondary trading volumes. However, these results provide an accurate representation of how the market has performed as a whole. We have seen significant levels of growth over the past year and the principal drivers behind this growth look set to continue over the coming year.