The necessity for extra liquidity amongst some traders is driving exercise within the secondary actual property market.
Secondary actual property offers contain buying and selling shares in non-public property portfolios, funds or particular person belongings of present traders. The market creates liquidity for usually illiquid transactions. The market additionally creates diversification alternatives for traders in the event that they select to unfold their investments throughout a bigger variety of trades.
The secondary actual property market set a file final yr with international gross sales of $12.4 billion, in accordance with various funding supervisor Ares Administration. The agency expects the market to stay very lively in 2023, even amid a way more unsure outlook for industrial actual property. Final yr’s $12.4 billion quantity was up 17% from 2021 and up 71% from the yr earlier than the pandemic in 2019, Ares stated. Transaction quantity is anticipated to proceed to develop in 2024, in accordance with Jamie Sunday, associate and co-head of actual property at Ares Administration.
Transaction quantity is certainly poised for vital additional progress over x years, Sunday stated. No matter occurs out there can be an extra catalyst of alternative.
Actually, the 2023 determine could also be an understatement as a result of many transactions are confidential and unreported, famous Brian DiSalva, a associate at Park Madison Companions, a capital options and advisory agency. He expects continued curiosity in promoting the secondary market as a result of there are extra gamers out there at present than there have been 10 years in the past, and they’re flush with capital.
We have been nonetheless in the course of the value discovery part, DiSalva stated. What’s being performed is smaller re-priced transactions and portfolios of high-quality belongings the place there’s debt that may be taken on at favorable phrases. They do, but it surely’s fairly quiet whereas they’re within the technique of opening the value. As we attain the tip of the Fed climbing cycle, we all know of many managers who’re planning massive transactions, whether or not they’re extending funding or resuming portfolios concentrating on late 2023 and early 2024.
Common associate (GP) sponsors are more and more turning to the secondary market as an alternative choice to present restricted associate (LP) liquidity and funding. They use the secondary market to boost capital to guard their portfolios and supply extra money and time to proceed implementing enterprise plans and attaining strategic targets, trade consultants say.
In response to Ares, GP-led transactions involving the recapitalization of funds and property portfolios reached a file $9.5 billion in 2022 and accounted for 77% of complete secondary gross sales.
With capital markets tightening in latest months, GPs are trying on the secondary market to recapitalize their investments and purchase themselves a while till they will promote the whole lot down, they stated on Sunday.
GPs would like to not promote their belongings proper now to make them extra motivated to hunt options for his or her portfolio wants, agreed David Lay, managing director of BGO Strategic Capital Companions, a world multi-manager platform. A difficult fundraising setting with persistent credit score shortages and depressed asset costs is fueling deal circulate within the secondary market, he stated.
It is a very thrilling and fascinating time for the secondary actual property market, similar to what we noticed over the last international monetary disaster, which catalyzed progress. This isn’t stunning. Secondary are options for offering liquidity and when there’s illiquidity out there, several types of traders whether or not they’re LP or GP look to the secondary marketplace for options.
About 1.5% to 2% of actual property internet asset worth (NAV) in non-public fairness is prone to commerce on the secondary market in 2024, or about $13 billion to $18 billion, in accordance with Michelle Creed, associate and co-head of actual property. secondary in Ares.
LP exercise
The state of affairs is totally completely different in the case of information. In response to Ares, the quantity of transactions made by long-term corporations promoting their stakes in value-added funds and opportunistic funds will lower to roughly $1.1 billion in 2022.
Nonetheless, elevated market volatility and the denominator impact skilled by many long-dated corporations might serve to extend deal circulate, which might push volumes in 2023 considerably larger than they’ve been traditionally, Niedelia stated.
He famous that the lower in distributions is affecting LPs’ liquidity and their means to spend money on what ought to be a powerful harvest yr following the fast aftermath of the Nice Monetary Disaster. As well as, the inventory market crash in 2022 prompted many information to be transferred to personal belongings. Secondary market gross sales could be a security valve the place long-term corporations can handle this allocation strain and liberate capital, he added.
Who buys and sells secondary
Sellers of secondary properties are typically numerous, however a number of the most lively are endowments or foundations that handle their portfolios extra actively, Lay stated.
In response to Ley, the primary consumers out there are particular funds, whose traders vary from excessive internet value people to institutional traders who see secondary funds as a beautiful alternative.
In response to Warren Kotsas, a associate at Park Madison Companions, the variety of consumers has grown at a formidable price over the previous 5 years. Earlier than that, it was a handful of specialists. In the present day, that quantity has greater than doubled, and extra entrants are on the way in which.
We anticipate that the pool of capital that makes a speciality of taking part in some of these transactions will proceed to develop, Kotsas stated. There are a selection of automobiles on the market boosting at present. Extra excitingly, lay folks change into extra lively over time. Insurance coverage corporations and non-traded REITs, asset managers, household places of work and sovereign wealth funds all see it as a method to immediately entry actual property and entry the belongings they like.
5 to 10 years in the past, there have been extra questions concerning the course of and problems, Kotsas stated. Whereas the secondary actual property market has existed so long as non-public fairness funds have existed to supply liquidity to long-term corporations, in accordance with Lay, the worldwide monetary disaster has change into a catalyst for the institutionalization of the market. Since then, purchaser consciousness has elevated and expanded the pool, Kotsas famous.
We’re in a very thrilling time for our market, he stated. The secondary market is a superb place to seek out options within the present setting.
Present costs
Secondary commodities are sometimes priced to the most recent reported honest market NAV and are virtually all the time priced at a reduction, reflecting the necessity for a liquidity premium, in accordance with Ley. NAV excellent at present is about $900 billion, in accordance with Ares Administration.
Presently, these reductions can vary from 20% to 50%, relying on the traits of the fund. He stated the fund’s asset varieties, fund supervisor, geographic location, fund tenure and progress potential all have an effect on pricing. For instance, funds targeted on the commercial and scholar housing sectors have decrease reductions than funds targeted on workplace actual property.
Reductions are typically excessive as a result of the fund’s NAV lags by way of valuation, stated Sunday, who additionally estimated the vary of reductions as between 25% and presumably greater than 50%. He added that because the markdowns work their method by means of estimates over the subsequent few quarters, the optics of worth cuts will enhance.
What’s estimated to be a 40% low cost from NAV on 09/30/22 might fall to a reduction of 20% to 25% by 03/31/23 based mostly solely on the NAV estimates introduced on Sunday. This can be an extra catalyst for long-term corporations that basically wish to transact and create some liquidity, however have optical thresholds to take care of.
