Equity raising by opportunistic real estate funds jumped to USD17bn globally in the second half of 2009, but the final capital closes for 26 non-listed vehicles came only after very extended marketing periods.

There was also a clear trend towards more small-cap funds, according to the latest research from Clerestory Capital, a New York-based real estate investment manager.

Joanne Douvas (pictured), co-founder and managing principal at Clerestory, says: “The fund closings in the latter half of last year represented a substantial volume of capital, which was 115 per cent higher than we recorded in the middle of 2009, but our research indicates that this was more a clearing of the gridlock than a real surge in new money from investors. Many of these funds began raising capital before the pivotal point in the credit crisis with the collapse of Lehman Brothers in September, 2008 and only after exhaustive marketing periods have they now closed. There is also a clear trend towards more small-cap vehicles as the equity targets for larger funds are proving too daunting in this investment environment.”

Clerestory carried out its research in January and February and found that 20 of the 26 opportunistic real estate funds that closed in the second-half of 2009 were small-cap (SC) and six were large-cap (LC), representing USD8.1bn and USD9.1bn of equity respectively. This was 115 per cent higher than in the first-half of last year, although due to variations in the dataset and timing of the data collection, this is indicative of the broad trend rather than being strictly statistically comparable.

Clerestory defines SC-Opportunistic funds as those raising less than USD1bn of equity and LC-Opportunistic funds as those raising more than USD1bn.

A further 14 new SC-Opportunistic funds seeking to raise USD5.3bn in equity and one new LC-Opportunistic fund looking for USD1.0bn entered the market during the second half of last year. These new funds included nine focused on investment in markets in the Americas, four on Asia and two on Europe.

Tommy Brown, co-founder and managing principal at Clerestory, says: “We think the trend towards smaller funds is also partly due to the generally low transaction volumes in real estate investment markets and that capital raising will scale-up to the opportunities available once they present themselves. With many notable fund managers out of the game, being sold, or having significant portfolio issues, these opportunities could fall to a new generation of managers.”

Brown adds that while a narrow section of the real estate transaction market, represented by well-let and well-located properties, continues to operate normally with robust pricing and debt availability, the remainder is characterised by challenging restructuring and refinancing of portfolios. Here equity and debt owners will continue to avoid recognizing losses until certain “crossover points” force the issue.

The crossover points that could undermine many of these fragile situations and result in the distressed sales of assets would include a further deterioration in market fundamentals and/or a rise in interest rates, he says.