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EDITOR'S LETTER: Detritus

PERE magazine July/August 2009.

A recent article in the New Yorker described America, which excels at consuming and discarding things at a high velocity, as the “Saudi Arabia of scrap”. In other words, the country has a lot of detritus to process – a side effect of its wealth.

The rich times gone by for real estate have left a market strewn with asset detritus, often in unusual and hard to reach places. Consumers rely on waste disposal services to clear away their cardboard boxes, broken toasters and plastic packaging. The real estate industry has no such organised effort. Instead, today's market is filled with freelance waste haulers, often called opportunity funds, driving through decimated neighbourhoods in pickup trucks, looking for discarded treasure.

The rich times gone by for real estate have left a market strewn with asset detritus, often in unusual and hard to reach places.

These freelancers have a hard time getting at the assets. They are, variously, sewn up in hedge fund side pockets, languishing on the balance sheets of busted banks, bundled up in collateralised mortgage obligations, owned by sovereign wealth funds that have soured on Western financial products, squabbled over by diminished-net-worth families, abandoned by investment firms who found themselves upside down in their own funds, half-built and towering monstrously on lots owned by bankrupt developers.

Once the assets are located and sized up, it is not the case that a smart investor would want to own them. But make no mistake – there's real estate gold in them there hills of garbage. And it is clear that momentum is building toward systematically sorting through the detritus and uncovering the gold.

As Zoe Hughes writes on p. 6, the planned IPO of Starwood Property Trust, which will target distressed commercial and residential real estate opportunities using financing from the US government rescue plans, TALF and PPIP, is not only a good example of a band of opportunistic investors forming to pick up troubled assets, but also evidence that capital is forming to match the scavenger talent.

Early word of success in these efforts will have a steroidal effect on the growth of these efforts. For many groups, the fact that investor interest in this strategy has picked up is reason enough to put together a team and take their own shots at opportunistic glory.

We'll be following these efforts with keen interest at PERE. There is much to clean up in the real estate market but we're confident our readers are best placed to do the job.

Enjoy the issue,

By David Snow
David.s@peimedia.com