Perspectives

Compared to 2023, total transaction volume was up 49% based on NAV traded and 9% based on number of transactions. This increase was propelled by a notable rebound in LP-led transactions and the continued strong growth of GP-led transactions, with LP-led and GP-led transactions registering equally impressive year-over-year increases of 45% and 52%, respectively.

By comparison, direct real estate transaction volume was still in an early stage of recovery, with the market recording only 11% year-over-year growth in global transaction activity during 2024 as tracked by MSCI. Despite this, fund-level distributions to LPs for the first nine months of 2024 were still down 19% and 75% from the same period in 2023 and 2022, respectively. Continued slow exit execution via the direct transaction market and muted distribution activity are fueling the need for LPs and GPs to look for alternative pathways to generate liquidity. We expect this trend to continue into 2025 and drive the ongoing growth of real estate secondary transactions.

Real Estate Secondary Transaction Volume

(Millions, by Reported Value, Source: Ares Management)

GP-Led Transactions Were Just Shy of Record 2022 Volumes

In 2024, GP-led transactions rose to $9.3 billion, reflecting a 52% increase from 2023, just shy of the record GP-led volume registered in 2022. Similar to 2022, the year saw two multi-billion-dollar transactions and several transactions in the $200 to $500 million range. The majority of these transactions, which were concentrated in specialized property sectors like data centers and cold storage, involved leading platforms that required significant amounts of new investment to recapitalize existing portfolios and fund development pipelines driven by high tenant demand.

GP-led transactions accounted for 64% of the total volume in 2024, roughly consistent with 63% in 2023. GP-led transaction volume surpassed LP-led transaction volume for the first time in 2019 and has since consistently accounted for the majority of the secondary transaction volume, with a five-year average of 67%. Since 2019, GP-led transaction volume has increased by an average of 19% annually. Recent Burgiss data indicates that just over $1.1 trillion of NAV is held across closed-end real estate funds, with $220 billion held in funds over eight years old. We expect this large and growing mature NAV base to continue driving strong GP-led market activity going forward. In addition, there is well over $1 trillion of NAV held in non-fund vehicles, such as joint ventures, co-investments and private REITs, which have seen significant secondary transaction activities in recent years.

LP-led Transactions Showed Strong Signs of a Resurgence

LP-led transactions continued their increasing trajectory from 2023, growing from $3.6 billion in 2023 to $5.3 billion in 2024 – a 45% increase. Open-end core funds, value-add and opportunistic funds accounted for 51% and 49% of the LP-led volume, respectively.

Transactions in value-added and opportunistic funds totaled $2.6 billion in 2024, more than double that of 2023, marking the first time since 2018 that the volume of these trades exceeded $2 billion. Pension plans, endowments, foundations and insurance companies were sellers of several large LP portfolios exceeding $100 million in size, including one transaction over $500 million in funds managed by a single GP. Despite this strong rebound, value-added and opportunistic total volume was still well below the pre-COVID five-year average annual volume of $3.4 billion, implying the potential for significant growth ahead.¹

Pricing discounts for most closed-end funds traded in 2024 ranged from 20% to 50%, which is meaningfully higher than historical average levels, and these elevated “optical” discounts kept some prospective sellers from transacting. Value-add and opportunistic funds as tracked by Burgiss had a net time-weighted return of negative 10% since Q1 2022. As private real estate funds continue to work through the appraisal lag, we expect that optical secondary pricing discounts to reported NAV will improve. This should attract more LPs to the secondary market, helping them to re-balance portfolios and meet liquidity needs.

Transaction volume for open-end core funds maintained strong momentum throughout 2024, reaching a record high of $2.7 billion. Many open-end core funds saw the peak of redemption queues in the first half of the year. We believe these redemption queues then started to decline as a result of managers’ continued efforts to make payouts and some investors rescinding their requests as an expectation of valuations bottoming has started to take shape.

In the U.S., through Q4 2024, appreciation returns for the NCREIF ODCE index turned positive for the first time since Q2 2022 after the index registered a cumulative negative appreciation return of 25%. In Europe, the INREV All Fund Index, primarily comprising core funds, recorded a cumulative value decline of 22% during the period from Q2 2022 through Q3 2024. However, the level of decline has slowed to 0.2% in the most recent quarterly results. Average pricing discounts for open-end core funds have improved throughout the year, decreasing from double digits to the single-digit range. The perception of open-end fund valuations nearing or at the bottom and the improving optical discount levels have drawn an increasing number of sellers and buyers to the secondary market.

Overall during 2024, U.S.-weighted partnerships accounted for 61% of total volume, European-weighted partnerships accounted for 26% and Asia-weighted partnerships accounted for 7%. Outside of GP-led fund and portfolio recapitalization transactions, insurance companies, U.S. pension and non-U.S. pension plans were the most active sellers in 2024, accounting for 12%, 10% and 8% of volume, respectively. U.S.-based sellers continued to be the most active, generating 69% of total volume, followed by Europe at 23%, Asia at 6% and Others at 2%.

Continued Growth Potential in 2025

The record setting $14.6 billion real estate secondary transaction volume in 2024 translates into approximately 1.3% NAV turnover ratio based on the estimated $1.1 trillion NAV held in close-end funds. Although $14.6 billion represented a record year and strong rebound from 2023 activity, the 1.3% turnover ratio is still well below the historical range of around 2% to 3% turnover seen in private equity secondary market. In other words, we believe there is significant potential for continued secondary volume growth going forward. Generating liquidity remains top of mind for both LPs and GPs heading into 2025. As such, we anticipate continued strong growth in GP-led transactions driven by:  1) the need to wind-up/generate liquidity to mature fund vehicles; 2) raising continuation vehicles for platforms and portfolios in sectors with favorable tailwinds in order to capitalize on development/growth opportunities and strong tenant demand; and 3) recapitalizing portfolios that need additional liquidity to deleverage/finish business plans. LP-led volumes are also anticipated to grow as optical pricing discounts improve, which will bring more investors to the secondary market to generate liquidity and rebalance their portfolios.

Ares is encouraged by this latest data, and we look forward to the anticipated opportunities in the market in 2025 and beyond.