The secondary market for real estate investments, which grew 30% in 2014 after years of being nearly dormant, is poised to grow 45% this year to up to $7 billion, observers say.
With several $1 billion or larger portfolios of limited partnership interests in real estate funds for sale — including CalPERS' plans to sell up to $3 billion of its real estate portfolio — the market appears ready for prime time.
Based on completed transactions, the market grew 30% to $4.8 billion in 2014 from the prior year. That compares with $2 billion in completed deals in 2011, according to data from Landmark Partners, an alternative investments manager that specializes in investments on the secondary market. Landmark predicts “record growth” in 2015, to the $6 billion to $7 billion range.
“Large institutional investors have recently become increasingly more comfortable in utilizing the real estate secondary market as a portfolio management tool,” said Jamie Sunday, partner in the real estate group in Landmark's Boston office.
During the past five years, there were about three secondary real estate transactions of $400 million or more, he said. So far this year, there have been six transactions in that range, of which several were larger than $1 billion, Mr. Sunday said.
The growth of the real estate secondary market helped entice CalPERS to put a portion of its portfolio on the market, spokesman Joe D'Anda said in an e-mail. “We believe conditions are favorable and we are testing the market,” Mr. D'Anda said. “So yes, it (the growth of the real estate secondary market) does play in to the timing of this sale.”
Respondents to a recent survey by Toronto-based secondary market broker Setter Capital predicted the real estate secondary market could reach $7.7 billion in 2015. Setter conducted the survey of the most active buyers in the secondary market for alternative investment funds in January.
While there are only a handful of buyers, they have or are raising substantial amounts. That interest, coupled with the fact that there are a limited number of large portfolios for sale, has pushed prices up. And rising prices are inducing other asset owners to return to the market.
In addition to the $304.5 billion California Public Employees' Retirement System, Harvard Management Co, which oversees the Cambridge, Mass.-based university's $36.4 billion endowment, has brought a $1 billion portfolio to market, industry insiders say.
Emily Guadagnoli, spokeswoman for Harvard Management Co., in an e-mail declined comment “as a matter of policy.”
“There's been so much capital formed for real estate secondaries, (managers) have been bidding prices up to very, very strong or aggressive levels,” said Jeff Giller, San Francisco-based partner and head of StepStone Real Estate, the real estate arm of consultant and money manager StepStone Group LLC.