Global real estate fundraising significantly declined in the third quarter of the year, dropping by 71% compared to the previous quarter. A total of $18.2 billion was raised by 61 funds. Property markets worldwide have been affected by central banks' interest rate hikes, resulting in increased borrowing costs and reduced property valuations, particularly for offices due to the growth of remote work. This reduced investor risk appetite. North America-focused funds remained dominant but saw a decline in their proportion, while Asia-Pacific funds increased their share. Funds focused on Europe and the rest of the world raised just 6% of the total capital. Uncertainty surrounding interest rates is expected to continue impacting real estate fundraising and transactions, keeping investment sentiment subdued.
According to a report prepared by Preqin, a privately-held London based investment data company, in the third quarter of the year, the global real estate fundraising sector experienced a significant 71% slump, with only $18.2 billion raised by 61 funds, marking a substantial decline from the previous quarter when 117 funds secured $63.4 billion. This dramatic downturn was primarily attributed to the impact of higher interest rates, which had the effect of cooling investor appetites for risk in the private real estate market.
Central to this decline is the turmoil that property markets worldwide have been experiencing due to interest rate hikes implemented by central banks. These rate increases have resulted in increased borrowing costs. Simultaneously, property valuations have suffered, especially in the case of office spaces, as the rise of remote work has led to diminished expectations for returns on such assets. This has led to a decrease in the expected returns by investors.
Henry Lam, Associate Vice President of Research Insights at Preqin, emphasized the scarcity of investment opportunities capable of providing a stable positive net income stream and a clear investment exit route. As a result, market participants are adopting a cautious "wait-and-see" approach, pending a more certain trajectory for future interest rates.
In terms of geographical trends, North America-focused funds continued to dominate the global fundraising landscape. However, their share of the market decreased from 81% in the previous quarter to 70% in the third quarter. In contrast, the Asia-Pacific region saw an increase in its share, reaching 24%. Japan, where borrowing costs remain low, emerged as an attractive destination for real estate investors. Meanwhile, funds focused on Europe and the rest of the world collectively raised a mere 6% of the total capital during the third quarter.
The value of global property transactions saw a decline, slipping from $31.9 billion in the second quarter to $26.9 billion in the third quarter, as reported by Preqin. Notably, office sales experienced a substantial drop of 20%, while industrial and residential buildings remained relatively active, with only minor drops of 3.2% and 6.3%, respectively.
The prevailing uncertainty surrounding interest rates is expected to continue affecting real estate fundraising and transactions. Investors are anticipated to seek out property types or markets that promise more predictable and certain returns. According to Henry Lam, in the short term, likely over the next one or two quarters, the sentiment for real estate investment is expected to remain subdued, with global fundraising and deal-making remaining relatively quiet.
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