2011 will be ‘great vintage’ for US acquisitions

Private equity real estate fund managers believe 2011 will be a “great vintage” for US property investments, with 2010 a “set-up” year to get their houses in order.

A survey of 120 fund managers by Ernst & Young revealed almost nine out of 10 managers, 89 percent, expected opportunities to buy US distressed real estate would increase or increase significantly by the end of 2010 – compared to just 76 percent for UK opportunities and 34 percent for China.

In its 2010 market outlook report, Gary Koster, global leader of real estate fund services, said this year would be a time when firms “set up … for the next chapter of opportunity. The sentiment for opportunistic investing in 2011 seems brighter and is being projected by many as the start of a great vintage of asset acquisitions.”

The sentiment for opportunistic investing in 2011 seems brighter and is being projected by many as the start of a great vintage of asset acquisitions. Gary Koster, Ernst & Young global leader of real estate fund services

Koster questioned 120 fund managers, and conducted roughly 20 face-to-face interviews, for the survey, which showed that roughly two-thirds of respondents believed that changing real estate fundamentals at the end of 2010 would continue to put downward pressure on values.

A further 62 percent of managers said national rent levels in the US would be lower at the end of 2010 than currently, compared to 5 percent that believed they would rise. In the UK, 65 percent of fund managers said rent levels would be higher at the end of 2010 against 5 percent who argued they would be lower.

However, despite the fact that US real estate markets had yet to hit bottom, GPs believed the pending wave of commercial real estate debt maturities would put pressure on the nation’s financial institutions to deal with their legacy loans by the end of the year, helping to boost the number of acquisition opportunities available for fund managers.

Conflicting hopes by fund managers for either deeper distress or quick economic recovery are driven by their relative levels of current real estate investment exposure and the amount of fresh capital they have available to take advantage of new opportunities.

In the US, 47 percent of GPs argued banks would start to trade their loans at reduced valuations at the end of the year, while 30 percent said banks would continue to extend problem loans while 23 percent believed banks would increasingly take action to foreclosure on real estate. In the UK, those figures were 18 percent, 52 percent and 30 percent respectively.

Koster told PERE that 2010 would see a “slow opening” of the US market, with banks only starting to deal with troubled loans, and foreclosing on real estate assets, as they “earn their way back to health”. However, there was increasing optimism about the opportunities in 2011.

“What real estate fund managers are rooting for remains a mixed bag. Conflicting hopes by fund managers for either deeper distress or quick economic recovery are driven by their relative levels of current real estate investment exposure and the amount of fresh capital they have available to take advantage of new opportunities,” Koster said in his outlook.

“Only one thing seems certain; real estate fund managers are unlikely to have it both ways.”