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30% of real estate GPs will disappear

Stephen Coyle, chief investment officer for Cohen & Steers' real estate funds of funds business, says many private funds will become 'zombies' as they attempt to hang onto over-levered assets with declining values.

Around a third of all private fund sponsors could disappear in the fallout of the current real estate crisis, as GPs struggle to deal with leverage and declining property values.

According to Stephen Coyle, chief investment officer for Cohen & Steers' global private real estate multi-manager strategy, the number of GPs in the industry is set to fall by “at least 30 percent”, with most of the remaining “see[ing] substantial turmoil and turnover in the years ahead”.

In his latest outlook note to clients, Coyle said the easy availability of debt during the peak of the market was now coming back to haunt some investors – but that it would create vast opportunities for private equity real estate.

With $1.2 trillion of outstanding commercial real estate loans set to mature between now and 2012, an estimated $550 billion to $700 billion of new equity is needed to recapitalise maturing and defaulting loans. “Who will address these needs? It will likely be both public and private real estate players,” Coyle said.

However, he noted that many funds bought assets with high loan-to-value ratios, and with prices down at least 24 percent in the US and 40 percent in the UK, “many funds will become zombies, attempting to delay the inevitable takeover by their lenders.” Coyle continued: “Who will survive? It is too early to say, but we expect that upwards of 30 percent of all private sponsors will cease to exist.”

He added that distressed debt sales were just beginning to take place, and that “they should arrive in earnest next year and should continue for a few years thereafter”.