Preqin - Real Estate Spotlight

Q1 2012 APRIL 2012

The

Preqin Quarterly Real Estate
Insight on the quarter from the leading provider of alternative assets data

Content Includes.... Investor Allocations
Are investors at target for their real estate allocations? What impact will this have on future fundraising?

Latest Fundraising Trends
A look at the current real estate fundraising market, the largest real estate funds closed in Q1 and our future predictions.

Performance
All of the latest private real estate returns data, including information from the new PrEQIn Private Equity Quarterly Index.

Sovereign Wealth Funds
What are the preferences of sovereign wealth funds investing in real estate?

alternative assets. intelligent data.

Q2 Special Guest Contributor: David Arthur, Brookfield Asset Management

Contents
Editor's Note PrEQIn Private Equity Quarterly Index Investor Commitment Sizes Sovereign Wealth Funds Investor Allocations Q1 2012 Fundraising in Focus
Fundraising Overview Regional Fundraising Largest Funds to Close in Q1

p3. p4. p5. p6. p8.
Editor:

p9.

Andrew Moylan
Production Editor:

Tim Short
Sub-Editors:

Funds on the Road
Funds on the Road Overview Largest Funds in Market Recently Launched Funds Fundraising Future Predictions

p12.

Helen Kenyon Sam Meakin
Contributors:

Dry Powder Performance Update About Preqin

p16. p17. p18.

Forena Akthar Carla Henry Jonathan Ma Andrew Moylan Sarah Unsworth Bronwyn Williams
Preqin: New York: +1 212 350 0100 London: +44 (0)20 7645 8888 Singapore: +65 6407 1011 Email: info@preqin.com Web: www.preqin.com

All rights reserved. The entire contents of Preqin Real Estate Quarterly are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Real Estate Quarterly is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Real Estate Quarterly.

While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Real Estate Quarterly are accurate, reliable, up to date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Real Estate Quarterly or

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for any expense or other loss alleged to have arisen in any way with a reader's use of this publication.

The Preqin Real Estate Quarterly, Q1 2012

Editor's Note
Fundraising for private real estate funds continues to be a challenging prospect, with 2012 seeing more funds on the road than ever before. That said, we saw some notable fundraising successes in Q1 2012, with more than half the funds that reached a final close doing so on or above target. The rest of 2012 is likely to remain challenging for firms seeking to raise capital, with many institutional investors content to remain on the sidelines. What we are not seeing, however, is investors abandoning the asset class. The majority of institutions globally are below their strategic target allocations to real estate and will be investing to meet these targets in the medium to longer term. We examine the numbers of investors that are below, at or above their targets on page 8 and break this down by investor type and location. Sovereign wealth funds represent a huge pool of capital, with the combined assets of these institutions now standing at $4.62tn. The average real estate allocation of sovereign wealth funds has increased in the past 12 months and they are likely to be even more important investors in the asset class in the future. Drawing on the extensive research carried out for The 2012 Preqin Sovereign Wealth Fund Review, we take a detailed look at sovereign wealth funds and their real estate investment preferences on pages 6-7. We take a detailed look at fundraising during the first quarter of 2012 on pages 9-11 and examine funds on the road on pages 12-15. We also provide the latest performance and dry powder figures on pages 16 and 17. The Preqin Real Estate Quarterly utilizes data from a variety of Preqin's products and publications in order to give a detailed overview of the latest market conditions. We hope you find it useful and informative. As always, if you have any feedback or suggestions for future content, please do get in touch.

Andrew Moylan, Editor

© 2012 Preqin Ltd. / www.preqin.com

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PrEQIn Private Equity Quarterly Index

PrEQIn Private Equity Quarterly Index

W

hile examining IRRs and multiples can be extremely useful, a different metric is needed by investors seeking to compare their private equity real estate portfolios with their overall investment portfolios, as well as directly with their investments in other asset classes. These asset allocation tasks call for metrics that facilitate comparison between private equity returns and those of other asset classes. The PrEQIn Index is a money-weighted index that uses fund-level cash flow transactions and net asset values for over 3,900 private equity funds collectively worth more than $2.7tn. These returns are then combined to form an index rebased to 100 as of 31st December 2000. The PrEQIn Index shows that all private equity strategies, with the exception of venture capital, have outperformed Standard and Poor's free-float capitalization-weighted index of 500 US-based large cap stocks (S&P 500) since 31st December 2001, as shown in Fig. 1. Indeed, the PrEQIn All Private Equity Index, which takes into account the performance of each of the various fund types, has remained above the S&P 500 for all of the quarters shown, with the exception of 30th June 2001, 31st December 2001 and 31st March 2002. As of the latest data available, the PrEQIn All Private Equity Index stands at 198.5 and the S&P 500 at 105.1. The PrEQIn Real Estate Index shows that during the boom period of private equity, real estate funds showed the highest performance of all fund types. The index has outperformed the S&P 500 across the reporting period, hitting a peak of 337.0 in Q2 2007. Despite this, however, private real estate performance experienced a sharp drop following the financial crisis, with the bursting of the real estate bubble. While there has been a gradual recovery for real estate returns from Q2 2010 to Q2 2011, this has been slower than for other private equity fund types. The latest reporting period shows a slight decline from the previous quarter, with the Index currently standing slightly below All Private Equity at 197.5. Relative Performance of Private Equity: Fund Quartile Indices As well as analyzing industry performance as a whole, the PrEQIn Index can be used to assess the variability of performance within the asset class. Preqin assigns quartile rankings to funds of the same vintage year, and where possible, funds which adopt similar strategies and a similar geographic focus. Fig. 2 demonstrates that while the Indices of all four quartiles show quarterly declines initially, the Top Quartile Index increases back above 100 in Q4 2002, and the Second and Third Quartile Indices move back above 100 in Q3 2004 and

Fig. 1: PrEQIn Index: All Strategies vs. S&P 500

Index Returns (Rebased to 100 as of 31-Dec 2000)

400 350 300 250 200 150 100 50 0
31/12/2006 30/09/2007 30/06/2008 31/03/2009 31/12/2009 30/09/2010 31/12/2000 30/09/2001 30/06/2002 31/03/2003 31/12/2003 30/09/2004 30/06/2005 31/03/2006 30/06/2011

PrEQIn All Private Equity PrEQIn Buyout PrEQIn Venture PrEQIn Real Estate PrEQIn Fund Of Funds PrEQIn Distressed Private Equity S&P 500

Source: PrEQIn Quarterly Index

Fig. 2: PrEQIn Index: Fund Quartile

600
Index Returns (Rebased to 100 as of 31-Dec 2000)

500 400 300 200 100 0
31/12/2000 30/06/2001 31/12/2001 30/06/2002 31/12/2002 30/06/2003 31/12/2003 30/06/2004 31/12/2004 30/06/2005 31/12/2005 30/06/2006 31/12/2006 30/06/2007 31/12/2007 30/06/2008 31/12/2008 30/06/2009 31/12/2009 30/06/2010 31/12/2010 30/06/2011

PrEQIn Top Quartile PrEQIn Second Quartile PrEQIn Third Quartile PrEQIn Fourth Quartile

Source: PrEQIn Quarterly Index

Q2 2005 respectively. The Top Quartile Index continues to show steep quarterly increases, reaching 396.8 in Q2 2008, before declining due to the financial crisis. After several quarters of decline, the Top Quartile Index then begins to recover, passing 400 in Q3 2010, and stands at 509.5 as of Q3 2011. Preqin's PrEQIn Quarterly Index is the industry's first quarterly performance index. Want to assess the performance of private equity vs. the S&P 500? Or within different private equity fund types and quartiles? Sign up for free! For more information please visit: www.preqin.com/index

The index is based on the following calculation: Percentage change in quarter = [(NAV at end of quarter + distributions during quarter)/(NAV at start of quarter + call-ups during quarter)] ­ 1

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The Preqin Real Estate Quarterly, Q1 2012

Investor Commitment Sizes

P

reqin has details of over 8,500 known institutional investor commitments to private real estate funds. Using this data we can analyze how the size of commitments made by institutional investors has changed over time. For funds of 2004-2006 vintage years, 32% of commitments were of less than $20mn. The proportion of commitments in this range falls to 28% for funds of 2007-2009 vintages and to 26% for funds of 2010-2012 vintages. The largest commitments, those of $200mn or more, accounted for 4% of commitments for 2004-2006 vintages, but 10% of commitments to 2010-2012 vintage funds. This level of commitment to a single fund can typically only be made by the largest investors, often public pension funds or sovereign wealth funds. Analyzing commitment sizes by investor location shows that the commitments made by North America-based investors are often larger than those made by European investors. The largest proportion of commitments made by European institutions falls in the $0-19mn range, with 43% of commitments in this bracket. In contrast, 26% of commitments made by North America-based investors were within this range. Just 7% of commitments made by European institutions were of $100mn or more in size, compared with 24% of commitments made by North America-based investors. The general trend for commitment sizes to increase is likely to be the result of several factors, including the growing importance of large investors such as sovereign wealth funds, which often have a large ticket size. It may also be the result of investors choosing to be more focused, by maintaining fewer fund relationships and investing more capital in those vehicles. For fund managers this means it is even more important than ever to focus on the right investors. Securing a large commitment from a cornerstone investor could have a significant impact on the fundraising success of a fund.

Fig. 3: Breakdown of Investor Commitments to Private Real Estate Funds by Size, 2004 - 2012
35%
Proportion of Commitments

32% 28% 26% 29% 28% 27%

30% 25% 20% 15% 10% 5% 0%

24% 21% 21% 15% 14% 14% 10% 8% 4%

$0-19mn

$20-49mn

$50-99mn

$100-199mn

$200mn+

Fund Vintage 2004-2006 Fund Vintage 2010-2012

Fund Vintage 2007-2009

Commitment Size

Source: Preqin Real Estate Online

Fig. 4: Breakdown of Real Estate Fund Commitments by Investor Location, Vintage Year Funds 2007 - 2012
45% 40%
Proportion of Commitments

43%

35% 30% 25% 20% 15% 10% 5% 0% $0-19mn $20-49mn $50-99mn $100-200mn $200mn+ North America-Based Investors Europe-Based Investors 4% 16% 8% 3% 26% 28% 29% 22% 21%

Commitment Size

Source: Preqin Real Estate Online

Preqin's Real Estate Online product contains details of over 8,500 institutional investor commitments to real estate funds, and detailed profiles for over 2,900 institutional investors that are actively investing in unlisted real estate. For more information on how Real Estate Online can be used to help you, or to register for a demo, please visit: www.preqin.com/realestate

© 2012 Preqin Ltd. / www.preqin.com

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Sovereign Wealth Funds

Sovereign Wealth Funds

D

Aggregate SWF Assets under Management ($tn)

espite ongoing economic uncertainty, we have not seen a return to the widespread withdrawals from sovereign wealth funds (SWFs) that occurred in the immediate aftermath of the global financial crisis, and the aggregate total assets of all sovereign wealth funds worldwide has continued to increase apace. SWF total assets under management have increased by nearly 15% since 2011, and now stand at $4.62tn. Despite this, there remains the possibility that some institutions will be required to cover the fiscal shortfalls of governments in the future. Total assets held by sovereign wealth funds have increased significantly over the last year, and this in turn has led to growing levels of capital being invested in alternative asset classes. As new sovereign wealth funds are launched and existing formation plans come to fruition, it is clear that this group of investors will remain an important potential source of capital for investment managers worldwide. SWFs tend to have longer-term investment horizons than other types of investors. Unlike pension funds or insurance companies, for example, many SWFs do not have specific liabilities to meet and as such they are more able to invest significant amounts of their portfolios in longer-term and alternative investments. Fifty-four percent of SWFs are known to invest in real estate, and a further 6% are considering investing in the asset class. Proportion of Sovereign Wealth Funds Investing in Real Estate by Total Assets Larger sovereign wealth funds are more likely to invest in real estate. As shown in Fig. 6, 83% of sovereign wealth funds with more than $250bn in total assets and 50% of SWFs with total assets of $50-249bn invest in real estate, whereas only 25% of SWFs with less than $1bn in total assets invest in the asset class. Method of Real Estate Investment Of the sovereign wealth funds investing in real estate, 62% invest both directly and indirectly. Twenty-six percent of sovereign wealth funds only invest in real estate directly, while 12% only invest indirectly. Fig. 7 shows the proportion of SWFs investing in real estate that gain exposure through direct investments, through private real estate funds and through listed real estate. A large proportion (85%) of sovereign wealth funds invest in real estate directly. Kuwait Investment Authority is one SWF that invests directly in the asset class. The $296bn SWF invests directly in real estate both in domestic and international markets. It also commits to private real estate funds and to listed real estate. Hong Kong Monetary Authority (HKMA) is

Fig. 5: Aggregate Sovereign Wealth Fund Assets under Management

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2008 2009 2010 2011 3.05 3.22 3.98 3.59

4.62

2012

Source: 2012 Preqin Sovereign Wealth Fund Review

Fig. 6: Proportion of Sovereign Wealth Funds Investing in Real Estate by Total Assets
90% 80% 70% 68% 83%

Proportion of SWFs

60% 50% 40% 30% 20% 10% 0% Less than $1bn $1-9bn $10-49bn $50-99bn $100-249bn $250bn or More 25% 36% 50% 50%

Source: 2012 Preqin Sovereign Wealth Fund Review

Fig. 7: Real Estate Investment Preferences of Sovereign Wealth Funds
90% 80%
Proportion of SWF RE Investors

85%

70% 60% 50% 40% 30% 20% 10% 0% Direct Private Real Estate Funds Listed Real Estate Funds 35% 59%

Source: 2012 Preqin Sovereign Wealth Fund Review

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The Preqin Real Estate Quarterly, Q1 2012

Proportion of SWF RE Fund Investors

another sovereign wealth fund that invests directly. Its real estate exposure comes via its wholly owned subsidiary, Real Gate Investment Company (RGIC). Through RGIC, HKMA has indirect stakes of 74% and 51% in two real estate joint venture companies. Fifty-nine percent of sovereign wealth funds invest in private real estate funds. New Mexico State Investment Council is one such institution and aims to create a diversified portfolio with respect to region, strategy and property type. The sovereign wealth fund also invests directly in the asset class and its real estate allocation is split equally between direct investments and private real estate fund investments. Listed real estate is less popular with sovereign wealth funds, with 35% including listed real estate investments as part of their real estate allocations. Private Real Estate Fund Strategy Preferences Opportunistic and value added are the strategies most favoured by the sovereign wealth funds that invest in private real estate funds (Fig. 8). New Zealand Superannuation Fund is one sovereign wealth fund that has committed to a number of value added and opportunistic real estate funds. It has a commitment to Willis Bond Capital Partners, a value added fund that invests in mixed use, residential, commercial, office, retail and industrial assets in New Zealand. Gateway Capital Real Estate Fund III is an opportunistic real estate fund that New Zealand Superannuation Fund has committed to. The fund targets opportunities in the Greater China region. While opportunistic and value added funds are relatively high risk, 55% of sovereign wealth funds that invest in private funds also have a preference for core funds. Lower risk/return profile core funds became increasingly popular with all types of investor following the financial crisis and sovereign wealth funds are no different. Debt and distressed strategy funds are favoured by 55% and 45% of SWFs respectively, while 40% have a preference for core-plus vehicles. Real estate funds of funds and secondaries funds are the least popular strategies among sovereign wealth funds that invest in private real estate funds, with just 10% of this type of investor expressing a preference for investing in such vehicles. Outlook Although the real estate asset class has experienced difficulties over the past few years, a significant proportion of sovereign wealth funds are still active in the asset class, and many will make new commitments in 2012. Texas Permanent School Fund State Board of Education has recently made several commitments to real estate. It committed $75mn to TA Realty Associates X and $50mn to OCM Real Estate Opportunities Fund V in 2011, and in January 2012 it committed $50mn to Prudential Senior Housing Partners IV. Alberta Heritage Savings Trust Fund intends to continue investing directly in real estate during 2012. Temasek

Fig. 8: Private Real Estate Fund Strategy Preferences of Sovereign Wealth Funds
80% 70% 60% 50% 40% 30% 20% 10% 0%
Core-Plus Value Added Fund of Funds Opportunistic Secondaries Distressed Debt Core

75% 65% 55% 55% 45% 40%

10%

10%

Source: 2012 Preqin Sovereign Wealth Fund Review

Holdings is optimistic about opportunities created by the needs of the growing middle income populations in Asia and other markets, and intends to remain active in the real estate market. That said, while many sovereign wealth funds are likely to remain active in the asset class, the real estate portfolios of many sovereign wealth funds were negatively affected by the financial crisis and some remain cautious about investing in the coming year. A number of new sovereign wealth funds were launched last year and, as these new funds develop, they are likely to diversify into alternative assets such as real estate. The diversification and potential for attractive returns offered by real estate investments means that the asset class is likely to remain an attractive option for these investors.

Now in its fifth edition, the 2012 Preqin Sovereign Wealth Fund Review is the largest, most comprehensive source of information on the opaque world of sovereign wealth funds. This year's publication features key analysis of the industry, covering sovereign wealth fund investment in private equity, real estate, infrastructure, hedge funds, public equities and fixed income instruments, as well as full profiles for over 60 key institutions. www.preqin.com/swf

© 2012 Preqin Ltd. / www.preqin.com

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Investor Allocations

Investor Allocations

T

Proportion of Investors

he actual real estate allocation of an investor relative to its target allocation has an effect on its likely activity in the asset class in the near future, and whether it is likely to be investing to move towards a target allocation or temporarily halting investment due to being over-allocated. By comparing the proportion of investors that are below, at, or above their target allocations to the real estate asset class, it may be possible to identify which groups of investors are likely to be the most active in the coming year. Of all real estate investors globally, 61% are currently below their target allocations to the asset class, 24% are at their targets, and 15% are above their targets. Some institutions have found themselves below their target allocations due to the decrease in the value of their property portfolios. Uncertainty within the industry has also persuaded some to halt their real estate investment programs, with institutions preferring to wait until there is improvement in the market before adding to their portfolios. Others have long-term policy targets and will make new commitments over a longer period of time in order to reach their target level of exposure. Sixty-eight percent of public pension funds are below their target allocations to real estate, while 16% are at their targets and the same proportion are above target. Public pension plans are one of the most active types of investor in private real estate funds, and with such a high proportion below their targeted level of exposure, it is likely that many of these organizations will be seeking new investments this year. Fifty-nine percent of endowment plans are currently below their real estate targets, 29% are at their targets, and the remaining 12% are over-allocated to the asset class. A similar split is observed in private sector pension plans, with 58% below target, 28% at their targets, and 14% exceeding their targets. With 18% of insurance companies above their target allocations to real estate, this group has the highest proportion of investors over-allocated to the asset class. Fifty-six percent of asset managers are at their target allocations to real estate, and only 33% are below target, suggesting they will be least compelled to make new investments in the next 12 months. However, because these institutions invest on behalf of their clients, their activity levels will also be influenced by client preferences. In terms of investor location, North American institutions are more likely to be below their policy targets, with 66% of these investors below target. Nineteen percent of North American investors are at their targets and 15% are over-allocated. Of those investors based in Europe, 56% are under-allocated, 30% are at target, and 14% are above their targeted levels

Fig. 9: Current Level of Real Estate Allocation Relative to Target by Investor Type
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Endowment Plan Insurance Company Public Pension Fund Private Sector Pension Fund Foundation Asset Manager

16% 16%

12% 29%

14% 28%

18%

14%

11%

27%

33% 56%

Above Target Real Estate Allocation At Target Real Estate Allocation Below Target Real Estate Allocation

68%

59%

58%

55%

53% 33%

Source: Preqin Real Estate Online

Fig. 10: Current Level of Real Estate Allocation Relative to Target by Investor Region
100% 90% 80% 15% 19% 14% 18%

Proportion of Investors

70% 60% 50% 40% 30% 20% 10% 0%

30%

24%

Above Target Real Estate Allocation At Target Real Estate Allocation

66%

56%

58%

Below Target Real Estate Allocation

North America

Europe

Asia and Rest of World

Source: Preqin Real Estate Online

of exposure. Those based in Asia and Rest of World are most likely to be above target. Eighteen percent of this group have actual allocations that exceed their targets. Fifty-eight percent of Asia and Rest of World-based investors are below target and therefore may still be making new investments in the coming year. A key resource for fund managers looking to raise capital, Preqin's Real Estate Online product features detailed profiles for over 2,900 institutional investors actively investing in unlisted real estate. Looking for an investor that is interested in your exact fund type/strategy? Want to know who is the best contact to reach out to? We can help. For more information, or to register for a demo, please visit: www.preqin.com/realestate

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The Preqin Real Estate Quarterly, Q1 2012

Fundraising Overview

I

n Q1 2012, 28 closed-end private real estate funds reached a final close having raised an aggregate $10.2bn in capital. This represents a 12% decrease on the $11.6bn raised during the same period in 2011, and is considerably lower than Q1 2010, when real estate funds closed on an aggregate $15.6bn in commitments from investors. In addition to the funds that held a final close in this quarter, 27 funds held an interim close, raising $7.0bn towards their overall targets. One of the largest funds to reach a final close in Q1 2012 was AG Core Plus Realty Fund III, which raised $1bn to acquire properties and invest in distressed loans throughout North America, Europe and Asia. Fig. 12 shows the average time spent on the road by funds closed since 2007. Funds that closed in Q1 2012 spent an average of 18.1 months in market, a slight increase on the time taken to reach a final close by funds closed in 2011. Funds closed in 2009 and 2010 spent an average of 16.6 months and 15.6 months in market respectively. The significant increase in time spent on the road in the years following the financial crisis demonstrates the difficulty in securing capital in the current challenging economic climate. The length of time taken for a private equity real estate fund to reach a final close is a useful indicator of the overall conditions in the current fundraising market. Fig. 13 demonstrates the breakdown of time spent on the road by funds that closed in Q1 2012. Thirty-three percent of funds did so having spent between 19 and 24 months on the road. Ten percent of funds achieved a final close within six months, while 24% spent more than two years in market. With more funds coming to market, firms already on the road are finding fundraising even more challenging. These results indicate that fundraising in the private real estate sector is yet to recover, with many investors deciding not to make new commitments. Consequently, funds are frequently spending longer on the road as they struggle to meet their equity targets in the tough fundraising environment.

Fig. 11: Quarterly Closed-End Private Equity Real Estate Fundraising, Q1 2008 - Q1 2012
90 80 70 60 50 43.8 42.6 64 81 78 78 62 48 39 36 38 26 37 38 40 31 34 39 28 Aggregate Commitments ($bn) No. Funds Raised

40 35.6 30 20 10 0
Q1 2008

20.7 15.7 15.6 15.2 13.0 12.4 14.1 12.7 11.6 11.6 13.1 10.2 10.1 7.5
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q1 2012

Quarter of Final Close

Source: Preqin Real Estate Online

Fig. 12: Average Time Taken for Funds to Achieve a Final Close, 2007 - Q1 2012
20
Average Time Spent in Market (Months)

18 16 14 12 10 8 6 4 2 0 2007 2008 8.7 11.5

16.6

17.3 15.6

18.1

2009

2010

2011

Q1 2012

Year of Final Close

Source: Preqin Real Estate Online

Fig. 13: Breakdown of Time Spent on the Road by Funds Closed in Q1 2012
35% 30%
Proportion of Funds Closed

33%

25% 20% 15% 10% 5% 0% 1-6 Months 10%

24%

Preqin's Real Estate Online product features detailed information on over 2,500 real estate funds that have reached final close. Want to know how the market for your fund has evolved over the years? We can help. For more information, or to register for a demo, please visit: www.preqin.com/realestate

14% 10% 10%

7-12 Months

13-18 Months

19-24 Months

25-30 Months

31 Months +

Time Spent on the Road

Source: Preqin Real Estate Online

© 2012 Preqin Ltd. / www.preqin.com

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Regional Fundraising

Regional Fundraising

I

n Q1 2012, 28 private equity real estate vehicles reached a final close on an aggregate $10.2bn in commitments. The fundraising results suggest that many investors are leaning towards more established markets, and North Americafocused funds have accounted for an increasing proportion of the total capital raised in the past few years. In Q1 2012, North America was the most popular region in terms of number of funds closed and aggregate capital raised, with 16 funds closing on a total of $6.9bn. The largest primarily North America-focused fund to close in this period was AG Realty Fund VIII, which raised $1.3bn to invest in sub-performing and distressed real estate assets and debt primarily in North America, but also in Europe and Asia. Related Real Estate Recovery Fund closed on $825mn, and targets residential and commercial loans and assets in major US cities. Eight funds primarily focused on Europe closed in the quarter having raised a total of $2.1bn, while four Asia and Rest of World-focused funds closed with an aggregate $1.2bn. The largest fund to close primarily focused outside the US was the opportunistic GTIS Brazil Real Estate Fund II, which closed on $810mn. The largest Europe-focused fund to close was Development Venture III, an opportunistic fund managed by AXA Real Estate, which raised 589mn. The 10 largest funds to close in the quarter are shown in Fig. 17. North America-focused funds have steadily increased their share of the overall fundraising market since 2007, as shown in Fig. 16. Funds focused on North American markets accounted for 68% of all the equity raised by real estate vehicles that closed in Q1 2012, after accounting for 66% of the total raised in 2011 and 60% of 2010's total. In Q1 2012, Europe-focused funds accounted for 21% of aggregate capital raised, while Asia and Rest of World-focused funds made up 12%.

Fig. 14: Closed-End Private Real Estate Fundraising by Primary Regional Focus, Q1 2012
18 16 14 12 10 8 6 4 2 0 North America Europe Asia and Rest of World 2.1 4 1.2 8 6.9 Aggregate Commitments ($bn) No. Funds Raised 16

Source: Preqin Real Estate Online

Fig. 15: Closed-End Private Real Estate Fundraising by Primary Geographic Focus, 2011 - March 2012
120 100 80 60 40 20 0 North America Europe Asia and Rest of World 41.9 35 39 98

No. Funds Raised Aggregate Commitments ($bn)

12.3

9.4

Source: Preqin Real Estate Online

Fig. 16: Breakdown of Aggregate Capital Raised by Region, 2005 - Q1 2012

100%
Proportion of Aggregate Capital Raised

Preqin's Real Estate Online product allows users to filter current and historic fundraising conditions by a variety of criteria, including geographic focus, fund strategy, vintage year, property type, fund size, fund structure, ethos and more. For more information on how Real Estate Online can help you, or to register for a demo, please visit: www.preqin.com/realestate

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 Q1 2012 27% 26% 28% 26% 14% 28% 15% 12% 23% 20% 23% 21% 32% 12% 19% 21% Europe 50% 49% 53%

55%

54%

60%

66%

68%

North America

Asia and Rest of World

Year of Final Close

Source: Preqin Real Estate Online

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Fig. 17: Top 10 Closed-End Private Real Estate Funds to Close in Q1 2012

Fund

Firm

Size (mn)

Strategy

Geographic Focus Property Focus North America, Europe, Asia Diversified

AG Realty Fund VIII

Angelo, Gordon & Co.

1,265 USD

Debt and Opportunistic

Largest Funds to Close in Q1

© 2012 Preqin Ltd. / www.preqin.com 1,010 USD Core-Plus and Debt North America, Europe, Asia Industrial, Multi-Family, Office, Retail 825 USD Debt, Distressed and Opportunistic US Multi-Family, Office, Retail 810 USD Opportunistic Brazil Office, Residential 589 EUR Opportunistic West Europe Hotel, Logistics, Mixed Use, Office, Retail 680 USD Debt, Distressed and Opportunistic US Condominium, Hospitality, Industrial, Land, Multi-Family, Office, Residential, Retail 571 USD Debt, Distressed, Opportunistic US Diversified 420 EUR Core-Plus and Value Added Europe Logistics, Office, Residential, Retail 546 USD Value Added US Industrial, Multi-Family, Office, Retail 436 USD Debt, Distressed and Opportunistic US Industrial, Multi-Family, Office, Retail. Senior Home
Source: Preqin Real Estate Online

AG Core Plus Realty Fund III

Angelo, Gordon & Co.

Related Real Estate Recovery Fund

Related Companies

GTIS Brazil Real Estate Fund II

GTIS Partners

Development Venture III

AXA Real Estate

U.S Real Estate Partners

AllianceBernstein

WCP Real Estate Fund III

Westport Capital Partners

Curzon Capital Partners III

Tristan Capital Partners

The Preqin Real Estate Quarterly, Q1 2012

Cornerstone Real Estate Fund VIII

Cornerstone Real Estate Advisers

Artemis Real Estate Partners I

Artemis Real Estate Partners

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Funds on the Road

Funds on the Road

A

s of April 2012, there are 449 closed-end private real estate funds on the road with an aggregate target of $166bn. The number and aggregate target of funds on the road has remained steady since the start of 2012, when 450 funds were targeting a total $165bn. As shown in Fig. 18, there has been an upward trend in the number of real estate funds on the road, rising from 363 funds in Q4 2009 to 449 funds at the start of Q2 2012. Between Q1 2009 and Q4 2010, the aggregate target fell sharply from $228bn to $132bn, with the largest fall occurring between Q2 2009 and Q3 2009. From Q4 2010 onwards, the aggregate target began to increase gradually as more managers launched new funds, suggesting an increase in confidence that they can successfully raise capital from investors. Of the 449 funds currently on the road, 249 are primarily North America-focused, and these funds are collectively targeting $93.8bn in commitments. The largest fund on the road globally is Blackstone Real Estate Partners VII. Blackstone Group has increased the target of the fund to $13bn and it looks set to become the largest closed-end private real estate fund ever raised. The opportunistic fund will seek to acquire high-quality distressed and/or managed properties at below market value. There are 107 Europe-focused funds on the road with an aggregate target of $41.3bn. European Diversified Property, managed by AXA Real Estate, is the largest Europe-focused fund in market, with a target of 1.5bn. The fund will adopt a core and core-plus strategy targeting a diversified range of properties throughout Western Europe. The 93 Asia and Rest of World-focused funds in market are looking to raise an aggregate $31.2bn. The largest Asia and Rest of Worldfocused fund in market is Fortress Japan Opportunity Fund II, which is targeting ¥100bn. The fund will adopt a debt strategy and will invest throughout Japan.

Fig. 18: Closed-End Private Real Estate Funds in Market over Time, Q1 2009 - Q2 2012
500 450 400 381 390 378 350 300 250 200 150 100 50 0
Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q2 2012
No. Funds Raising 150 93.8 107 93 Aggregate Target ($bn)

363

376 383 378

403

428

441 437 436 450 449

No. Funds Raising 228 227 199

178 173

147

134 132 138

159 148 148 165 166

Aggregate Target ($bn)

Q3 2010

Source: Preqin Real Estate Online

Fig. 19: Closed-End Private Real Estate Funds in Market by Primary Geographic Focus
300 249

250

200

100

50

41.3

31.2

0 North America Europe Asia and Rest of World

Source: Preqin Real Estate Online

Preqin's Real Estate Online features in-depth information regarding the 449 private real estate funds currently in market seeking capital. Want to see which fund strategy is the most overcrowded at the moment? We can help you identify gaps in the market. For further information, or to arrange a demo, please visit: www.preqin.com/realestate

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Fig. 20: 10 Largest Real Estate Funds in Market

Fund

Firm

Target Size (mn)

Strategy

Geographic Focus

Blackstone Real Estate Partners VII

Blackstone Group

13,000 USD

Opportunistic

North America, Global

Largest Funds in Market

© 2012 Preqin Ltd. / www.preqin.com Brookfield Asset Management 4,000 USD Opportunistic Global Starwood Capital Group 2,500 USD Debt, Distressed and Opportunistic Global Rockpoint Group 2,500 USD Distressed and Opportunistic North America, Europe, Asia Walton Street Capital 2,000 USD Opportunistic North America Westbrook Partners 2,000 USD Value Added US, UK, France, Japan CIM Group 2,000 USD Core and Core-Plus North America AXA Real Estate 1,500 EUR Core and Core-Plus West Europe, North Europe Orion Capital Managers 1,300 EUR Opportunistic West Europe Perella Weinberg Partners 1,200 EUR Opportunistic Europe
Source: Preqin Real Estate Online

Brookfield Strategic Real Estate Partners

Starwood Distressed Opportunity Fund IX

Rockpoint Real Estate Fund IV

Walton Street Real Estate Fund VII

Westbrook Real Estate Fund IX

CIM VI: Urban REIT

European Diversified Property

The Preqin Real Estate Quarterly, Q1 2012

Orion European Real Estate Fund IV

Perella Weinberg Real Estate Fund II

13

Recently Launched Funds

Recently Launched Funds

I

n Q1 2012, 46 new funds were launched targeting an aggregate $14.1bn. Although three more funds were launched in Q1 2012 than in Q4 2011, the aggregate target was lower than the $20.5bn aggregate target for funds launched in Q4 2011. The lower aggregate target may be a reflection of the fierce competition in the fundraising market. There have, however, been several large funds launched in Q1 2012, including Orion European Real Estate Fund IV, Cerberus Institutional Real Estate Partners (Series Three) and Torchlight Debt Opportunity Fund IV, all of which are targeting commitments in excess of $1bn. Of the 46 funds coming to market, 31 North America-focused funds are targeting an aggregate $8.9bn, accounting for approximately 63% of the capital being sought by all funds launched in Q1 2012. Eight Europe-focused funds were launched with a combined target of $3.7bn, while seven Asia and Rest of World-focused funds were launched with an aggregate target of $1.6bn. Fig. 23 shows the 10 largest funds launched in Q1 2012, the largest of which was Orion European Real Estate Fund IV. Managed by Orion Capital Managers, the fund is looking to raise 1.3bn with a focus on opportunistic investments in Western Europe. Of the 10 largest funds, six funds are primarily North America-focused, three are Europe-focused and one is a Brazil-focused offering.

Fig. 21: Closed-End Private Real Estate Funds by Fundraising Launch Date

60

56

50 43 40 37 30 25.6 23.1 16.3

46 No. Funds Launched

30

20

20.5 14.1

Aggregate Target ($bn)

10

0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012

Source: Preqin Real Estate Online

Fig. 22: Closed-End Private Real Estate Funds Launched in Q2 2012 by Primary Geographic Focus
35 31 30 25 20 15 10 5 0 North America Europe Asia and Rest of World 8.9 No. Funds Launched

Aggregate Target ($bn) 8 3.7 1.6 7

Source: Preqin Real Estate Online

Fig. 23: Top 10 Real Estate Funds Launched in Q1 2012 by Target Size Fund Orion European Real Estate Fund IV Cerberus Institutional Real Estate Partners (Series Three) Torchlight Debt Opportunity Fund IV DLJ Real Estate Capital Partners V Crow Holdings Realty Partners VI Hemisferio Sul Investimentos Fund IV Heitman Value Partners III IVG Garbe Logistik Fonds Virtus Real Estate Capital Fund AEW Europe Partners Firm Orion Capital Managers Cerberus Real Estate Capital Management Torchlight Investors DLJ Real Estate Capital Partners Crow Holdings Capital Partners Hemisferio Sul Investimentos Heitman IVG Funds Virtus Real Estate Capital AEW Europe Target Size (mn) 1,300 EUR 1,250 USD 1,000 USD 750 USD 750 USD 650 USD 600 USD 400 EUR 500 USD 350 EUR Strategy Opportunistic Debt, Opportunistic Debt Opportunistic Core-Plus, Value Added Value Added Value Added Core Value Added Debt, Distressed, Opportunistic
Source: Preqin

14
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The Preqin Real Estate Quarterly, Q1 2012

Fundraising Future Predictions

T

he $10.2bn raised by 28 closed-end private real estate funds holding final closes in Q1 2012 represented a decline on the $15.7bn raised by funds closed in the final quarter of 2011. As more data becomes available it is likely that the final total for Q1 2012 may rise by 10-20% and so it seems likely that the total will be comparable to quarterly totals in the first three quarters of 2011, which ranged between $11.6bn and $13.1bn. As the table below shows, there were firms which achieved considerable fundraising success in the first quarter of 2012. Cornerstone Real Estate Advisers was able to raise $546mn for its Cornerstone Real Estate Fund VIII, significantly more than its $400mn target, while GTIS Brazil Real Estate Fund II, which had a $600mn fundraising target, closed on $810mn. Fifty-seven percent of funds to close in Q1 2012 did so on or above their target size, compared with 41% in Q1 2011 and just 7% in Q1 2009. Fundraising clearly remains a challenging prospect, however, with the market remaining extremely competitive. The number of funds on the road has remained steady during the last three months and 2012 has seen more funds in market than at any time in the history of the industry. A further 46 funds came to market in Q1, targeting $14.1bn in commitments. Firms launching new funds clearly feel that the fundraising market is improving and that they will be able to raise capital for their offerings, but at present there is not sufficient investor appetite for all the funds on the road to reach their targets. The aggregate target of all funds on the road is more than three times the amount of capital raised during 2011. Many fund managers have been forced to delay anticipated closings and this looks set to continue during the coming months. Fundraising remains a long process at present,
Fig. 24: Sample of Funds Closing above Target in Q1 2012

with funds to close in Q1 2012 spending an average of 18.1 months in market. Fifty-seven percent of funds spent more than 18 months fundraising, with 24% spending in excess of two years on the road. Twenty-seven funds held interim closes during Q1, raising $7.0bn towards their fundraising goals. This does offer some encouragement for firms raising capital, as it suggests that there is more momentum in the fundraising market, with managers raising sufficient capital to hold closes and begin making investments. The majority (61%) of all institutional investors globally are below their strategic target allocations to real estate, which demonstrates that there is a significant potential pool of capital to enter the asset class. However, many institutions will not immediately be making commitments to move closer to their targets and many are content to remain on the sidelines in the short term. Fundraising looks set to remain challenging during the remainder of 2012. There are many investors actively reviewing opportunities and making new commitments, but also a large number that do not expect to be active. Fundraising in 2012 seems likely to continue at a similar rate to that in 2011 and, given the large number of funds on the road, fund managers will have to work hard to stand out from the crowd if they are to be successful in the coming months. We are likely to see some firms achieve considerable success, but there will also be some managers facing tough choices regarding their fundraising prospects.

Fund AG Realty Fund VIII Artemis Real Estate Partners I Cornerstone Real Estate Fund VIII GTIS Brazil Real Estate Fund II Henderson German Retail Income Fund Related Real Estate Recovery Fund Rockford Real Estate Fund I Thackeray Partners Realty Fund III Tricon XII WCP Real Estate Fund III

Firm Angelo, Gordon & Co Artemis Real Estate Partners Cornerstone Real Estate Advisers GTIS Partners Henderson Global Investors - Property Related Companies Rockford Capital Partners Thackeray Partners Tricon Capital Group Westport Capital Partners

Target Size (mn) 1,250 USD 350 USD 400 USD 600 USD 150 EUR 750 USD 30 USD 200 USD 150 CAD 500 USD

Final Size (mn) 1,265 USD 436 USD 546 USD 810 USD 175 EUR 825 USD 35 USD 225 USD 186 CAD 571 USD
Source: Preqin Real Estate Online

© 2012 Preqin Ltd. / www.preqin.com

15

Dry Powder

Dry Powder

T

here is a total of $160bn in dry powder available to closed-end private real estate fund managers globally. This is a small increase on the $156bn available to fund managers in December 2011. Fig. 25 shows the level of dry powder available and amount of capital invested by closed-end private real estate funds by vintage year. There is $21bn in dry powder available to both 2008 and 2009 vintage funds, $34bn available to 2010 vintage funds, and $58bn available to 2011 vintage funds. The levels of dry powder available each year since 2003 by primary regional focus are shown in Fig. 26. Funds with a primary focus on North America have $91bn in dry powder available to them as of March 2012, an increase on the $85bn available in December 2011. Primarily Europefocused funds have $36bn in dry powder, a decrease from the $37bn available in December 2011. Asia and Rest of World funds have $34bn available in dry powder. Asia and Rest of World-focused dry powder has decreased since December 2009, while the amount available to Europefocused funds has remained relatively stable and, after an initial drop, the dry powder available to funds targeting investments in North America-focused funds has started to increase again. Fig. 27 shows the amount of dry powder available to closed-end private real estate funds by strategy since 2003. Opportunistic funds have seen an increase in the amount of dry powder available to them since December 2011, increasing from $62bn to $66bn. The amount of dry powder available to opportunistic funds decreased dramatically after December 2009 and this is the first increase in the level of dry powder held by such funds since then. Similarly, value added funds' dry powder levels decreased since December 2009, dropping by $23bn to $36bn. Debt and distressed strategy funds saw levels of dry powder increase after December 2009, and stand at $26bn and $14bn respectively. Closed-end core funds hold $8bn in dry powder and core-plus funds have $7bn available to invest.

Fig. 25: Closed-End Private Real Estate Funds - Capital Invested and Dry Powder Remaining by Vintage Year as of March 2012
160 140 120 100 85 80 60 40 20 0 2 2005 4 2006 2007 2008 2009 2010 2011 15 21 34 20 72 58 49 27 21 Capital Invested ($bn) 117 Dry Powder ($bn) 147

Vintage Year

Source: Preqin

Fig. 26: Closed-End Private Real Estate Dry Powder by Primary Geographic Focus, December 2003 - March 2012
120 100
Dry Powder ($bn)

80 60 40 20 0
Dec-09 Dec-10 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-11 Mar-12

North America Europe

Asia and Rest of World

Source: Preqin

Fig. 27: Closed-End Private Real Estate Dry Powder by Strategy, December 2003 - March 2012
100 90 80 70

Preqin's Real Estate Online features up-to-date and historic information on the levels of capital held in reserve by real estate funds, and customizable league tables of those GPs with the most dry powder. For further information, or to arrange a demo, please visit: www.preqin.com/realestate

Dry Powder ($bn)

60 50 40 30 20 10 0
Dec-10 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-11 Mar-12

Core Core-Plus Value Added Opportunistic Debt Distressed

Source: Preqin

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The Preqin Real Estate Quarterly, Q1 2012

Performance Update

T

he real estate industry has been through a turbulent period in the past few years, and fund performance has been adversely affected. The financial crisis negatively impacted many private real estate funds, and in many cases performance has yet to improve as it has for many other private equity strategies. Preqin holds individual, net-to-investor fund returns, i.e. after management fees and carried interest, for over 950 closed-end private real estate funds and Fig. 28 shows the median IRRs for closed-end private real estate funds by vintage year, alongside top and bottom quartile boundaries. Vintage 2002 funds have generated strong returns, with the median fund generating a 14.7% IRR and top quartile funds generating returns of at least 27.3%. For 2000 vintage year funds, the minimum IRR required to avoid being a bottom quartile fund is 12.2%. To quartile funds with vintages between 2000 and 2003 have IRRs of over 20%. 2005-2007 vintage funds have negative median IRRs, showing the impact of the financial crisis on the real estate market. 2008 and 2009 vintage funds show some degree of recovery with the median funds in the black. Top quartile 2008 vintage funds have IRRs of 13.8% and above and top quartile 2009 vintage funds have IRRs of 14% and above. There is a significant difference between the performance of top and bottom quartile funds. Top quartile funds have never posted negative IRRs for any vintage, while bottom quartile funds with 2005, 2006, 2007, and 2008 vintages have double digit negative IRRs. Funds with more recent vintages still have significant amounts of capital to call up and so the performance of these funds may change significantly based on the success with which their dry powder is invested. Called-up Capital, Distributed Capital and Remaining Value Fig. 29 shows the median ratios of called-up to committed capital, distributed to paid-in capital and remaining value to paid-in capital by vintage year. This shows how funds with vintages between 2004 and 2007 have been negatively impacted by the financial crisis. It is too early to meaningfully assess the performance of the most recent funds, as they still have a significant amount of capital to call up and invest. The median 2010 vintage fund has still only called up 30% of its capital. The investments that funds of these vintages will go on to make will have a significant impact on their performance. Closed-end private equity real estate funds with earlier vintages have

Fig. 28: Closed-End Private Real Estate - Median Net IRRs and Quartile Boundaries by Vintage Year
30 25 20
Net IRR since Inception

15 10 5 0 -5 -10 -15 -20
Vintage Year

Top Quartile IRR Boundary Median IRR

Bottom Quartile IRR Boundary

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
2011

Source: Preqin

Fig. 29: Closed-End Private Real Estate - Median Called-up, Distributed and Remaining Value Ratios by Vintage Year
180 160 140 120 100 80 60 40 20 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Remaining Value to Paid-In Capital (%) Distributed to Paid-In Capital (%) Called-up to Committed Capital (%)

Vintage Year

Source: Preqin

seen median distributions of over 140% and, in the case of 1999 and 2001 vintage funds, over 150%.

Preqin's Real Estate Online features net-to-LP performance data for over 900 real estate funds, custom benchmarks and the PrEQIn Private Equity Quarterly Index. For further information, or to arrange a demo, please visit: www.preqin.com/realestate

© 2012 Preqin Ltd. / www.preqin.com

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About Preqin

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