Friday Letter Playing in a crowded field

Opportunity funds are not alone in wanting to cherry-pick real estate assets at attractive prices. 

It is often said that journalists like a bad news story, but the same can be said about distressed investors.

Two reports this week grabbed the attention of readers of; the first was the possible bankruptcy protection of US REIT General Growth Properties; the second was about administrators selling assets owned by Lehman Brothers in Asia. Both stories underscore the vast scope of interest in situations which might lead to investors being able to pick off real estate assets at attractive prices. But the more interesting of the two is the Lehman Brothers situation.

It highlights not only how an accountant, in this case KPMG, moves from an administration phase (trying to preserve value) to a realisation phase (selling assets); what is also striking is that there have been more than 250 expressions of interest in Lehman’s Asia assets. These have a par value of $1.26 billion.

Of these 250 parties, not all will have the financial means (read access to finance) to perform a deal. But the sheer number of potential suitors does indicate a deep reservoir of real estate investors who figure they have some capacity and the desire to buy. This is despite gloomy economic forecasts coming out of Asia and projections for further falls in the capital value of property.

KPMG, which has been working through Lehman’s Asia property assets for months, is currently interviewing potential buyers as part of a “market discovery” process, after which the accountant will know more about the proportion of the 250 that are really in a position to invest.

Ahead of the completion of that process, you can bet there are private equity real estate opportunity funds in that category. Just think of Lone Star, which recently raised $20 billion for distressed commercial real estate assets and residential mortgages, defaulting corporate bonds and loans.

According to KPMG, the main country and currency risk exposure of the Lehman book reside in Thailand and China – two countries that are certainly on the target list of many of the Asia opportunity vehicles. The challenge for opportunity funds, though, is that these countries are also on the list of many other types of investor looking for assets at bargain prices. When you factor in sovereign wealth funds, private property investors, pure debt investors, public property companies, hedge funds and even pension funds and core and core-plus real estate funds, it becomes clear that opportunity funds will be playing in a crowded field.

The interest in assets at rock bottom prices is as widespread as the types of assets themselves.

Opportunity funds will be doing their best to buy, but they have their work cut out.