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UK private fund managers poised to 'pounce' on real estate opportunities

U.K. private fund managers are readying themselves for investments in real estate once second-quarter mark-to-markets are established, and clarity around valuations emerges, according to market experts.

Many managers are assessing future opportunities but are waiting for the uncertainty to ease before striking new deals.

They will be considering areas "where there is some distress and where they'll be able to relieve that distress, whether it's with providing loans or by way of some sort of equity participation," Adrian Levy, partner and co-head of real estate at law firm Clifford Chance LLP, said. Managers are likely to look to the public markets where deals are "easier and quicker to execute" and there is pricing certainty, he added.

REITs that suffered the swiftest valuation decline are also potential investment opportunities, Gianluca Romano, global head of indirect capital research at real estate services firm JLL, said in an email. He expects private markets opportunities to emerge from market dislocation after second-quarter results. "There is a lot of capital on the sidelines waiting to pounce on investment opportunities," he said.

In asset terms, many could be beneficiaries of the coronavirus pandemic, making them attractive investment propositions.

Healthcare real estate, technology and data centers are among them, with demand for the latter stoked by the surge in remote working since the outbreak of the virus. Logistics and related industries will also remain popular due to rising reliance on home deliveries. And while it has suffered in the short term, the flexible office sector could be a medium-term beneficiary as businesses seek attractive, flexible workplaces. Self storage, too, could benefit as businesses that have closed, and individuals that are unable to move house or are looking to downsize, put belongings into storage.

Challenging times

Dealmaking has generally been on pause since the outbreak of the pandemic. Along with valuation uncertainties, it is difficult for private fund managers to carry out inspections and therefore execute deals, Levy said. "It would be a very brave private equity fund to acquire any assets when you can't go out and you can't inspect what you're acquiring. Not to mention the difficulties in the debt market and trying to convince any provider of debt to support a transaction where there isn't full diligence."

But there have been exceptions. Clifford Chance partner Ian Painter has seen development property transactions complete where investors were able to secure bank debt to continue with development or refinance an acquisition. One private equity firm has also bought up private rental sector, or PRS, opportunities, "buying them under development, forward purchasing, because it sees the fundamentals of the PRS market are unchanged by COVID-19," he added.

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A substantial U.K. private equity real estate deal also closed in May amid the pandemic. The Blackstone Group Inc. bought iQ Letting Property Partnership for £4.7 billion, according to Preqin data. The deal, which was announced in February, was one of the largest U.K. private equity real estate deals in a decade.

Although student accommodation may suffer in the short term due to students' economic circumstances and as universities switch to virtual classes, sentiment remains that the market has "come from nowhere in the last 10 years, and it’s here to stay," Levy said. Demand is high, while supply is limited, so it is likely to "weather the storm" and become an increasingly important asset class, he added.

Very significant investors

Private equity real estate managers have grown in size over the past decade, as firms deployed capital and institutional investors sought to increase their allocations to the asset class.

"Emerging from the global financial crisis, some houses started to get their skates on, became very successful money raisers and very successful at deploying capital into projects in a rising market," said one London-based real estate adviser, who wished to remain anonymous. Deals made between 2012 and 2016 benefited particularly. "Even if they weren't that good a deal, the market generally would be riding in their favor."

Now, with large amounts of dry powder to spend, private equity buyers could be "very, very significant investors" if asset pricing adjusts down to attractive levels relative to long-term averages, said Richard Womack, Partner at Cushman & Wakefield. U.S. opportunity funds were a dominant part of the London capital markets space in 2013, 2014 and 2015. "They were the major investors. They got their timing absolutely right," he added. Even if asset pricing does not fall off, private fund managers will be "reasonably important, looking at strategic plays where the sectors look attractive."

This is "not the time" for private equity managers without real estate expertise to start investing, said Tom Whelan, a private equity partner at McDermott Will & Emery LLP. "But if you're already real estate investing, it's really [about] picking your winners and the right horse to back. And yes, I think it's safe to say, it's not for the faint-hearted in the current climate."