ALTERNATIVE SECTORS DOMINATE PORTFOLIO INVESTMENT MARKET
Portfolio investment activity in the UK hit £7.9 billion during 2016 – a 46% fall on the exceptional levels seen in 2015 – with alternative sector transactions accounting for half of all portfolio investment activity, according to new research from property consultancy Gerald Eve.
The alternative sector – including student housing and hotels – had the most diverse buyer pool ranging from sovereign wealth to owner operating platforms. This trend is in line with the wider investment market where alternative investment markets accounted for just 8.5% of the total transaction volumes in 2015 and an impressive 19% in 2016. Alternative sector portfolios also accounted for all big ticket deals over £500 million with no other sector hitting this threshold.
Conversely, portfolio transactions within traditional sectors were dominated by private equity. Such vehicles have a strong demand for both sizeable portfolios that reach critical mass and, significantly, sub-£50 million granular portfolios. Demand in this second category is exceeding that seen in previous years, but portfolio composition Is increasingly critical to ensuring successful sale execution – one in five mixed-use or business space portfolios either failed to sell or were subsequently broken up over the course of 2016.
John Rodgers, partner at Gerald Eve, said: “It is perhaps not surprising that private equity stepped in as funds were significant net dis-investors last year, and I expect PE to continue to dominate purchasing activity in 2017.
“The liquidity in both granular and large scale portfolios is strong, however the dark art of portfolio composition has become increasingly important. This is a good time for investors to consider rebalancing their portfolios by pruning the tail and selling out smaller assets.”
“It’s also notable that a large proportion of stock is being sold off-market or with restricted marketing – about half of all transactions and three quarters of those Gerald Eve has advised on. This goes hand-in-hand with some of the rebalancing that is going on, and is a trend we expect to continue.”
Private equity has transacted a staggering £40 billion of assets over the past three years across both non-performing loan and direct portfolio markets. Through their inevitable divestment programme, it is already an important source of stock through sales in earlier vintage funds – accounting for 20% of sales last year – but there are a number of barriers to overcome to access this stock.
Leo Zielinski, partner at Gerald Eve, said: “The unpicking of assets from the portfolios acquired by private equity over the past three years is set to become the story of the next part of the cycle and will help to alleviate the scarcity of stock.
“There are challenges to be overcome – notably currency repatriation and further geopolitical risk – but these are neither insurmountable nor a major barrier to those investors willing to commit.
“We see a continuing dominance of large scale portfolios in the alternative sector given the unrelenting demand for long secure income or owner operating platforms seeking to grow AUM as sectors consolidate.”
2017 is also anticipated to see the consolidation and expansion of listed real estate vehicles as investors seek cost savings with efficient management platforms and increased asset diversity. This will be particularly prevalent with non sector-specialist entities. The second half of 2017 is expected to be especially deal-heavy, with over 50 active investors seeking portfolio opportunities with total combined requirements of £20 billion.
John Rodgers added: “We’re anticipating increased activity from the listed sector over the course of 2017, a theme that’s set to continue for the foreseeable future. Acquisitions of portfolios through corporate activity are increasing in popularity and will be a prevalent source of portfolio trades. That said, further geopolitical uncertainty and low levels of available stock are two key factors that could hold back portfolio volumes and potentially prevent them exceeding 2016 levels.”
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