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Make your next move your best move

Transaction volumes have started to pick up, but the bid-ask spreads aren't the only remaining stumbling block: GPs don't want to see their post-crash coming-out party ruined by a dumb deal. By Zoe Hughes.

Global real estate transaction volumes are starting to slowly creep back from their lows of the second quarter of this year.
 
After being off more than 80 percent from the peaks seen in 2007, recent research by Real Capital Analytics and Jones Lang LaSalle has shown deal flow is starting to resume once again. Just this week, German open-ended fund Deka Immobilien spent $207.8 million (or $830-a-square-foot) for the Washington DC office block 1999 K St. NW from Vornado Realty Trust.
 
The pick up in transaction volume is, and will, continue to be slow for the near future – notably because there are few means of bridging the spread between the price buyers are willing to offer and the valuation sellers are willing to accept.
 
After the tumult of the past nine months, sellers are, perhaps understandably, still hanging on to the hope that prices will rebound, if not to their previous highs, at least to a place where some equity can be salvaged.
 
Sellers though need to be wary of having too firm a grip on their assets. One market participant told PERE that in many cases sellers are dismayed to find that, after having a case of remorse over a rejected bid, an offer price has declined upon returning to the negotiating table.
 
“You give a seller a price at a particular point in time,” the fund manager said. “If they come back weeks later, the realities of the market have changed and so has the price.”
 
Buyers are therefore not rushing to buy, knowing only too well that tomorrow could bring even better opportunities.
 
However sellers also need to understand the fear that is also driving investors in 2009’s harsh real estate investment world. That is, what you buy today could become your legacy for, possibly, the rest of your career.
 
“The pressure is on investors not to make a dumb move right now,” the fund manager added. “The first deal they make in this environment is going to be remembered. They will have to answer why they did that deal next month, they’ll have to answer it when they raise their next fund and they will have to answer it when they go for that next job.”
 
As a result, private equity real estate investors are being more cautious and picky about what they buy. Yes, it’s all about the quality of the real estate, but GPs also need to stay alive for tomorrow, in order to enjoy today.
 
Sellers know there is money on the sidelines. But it is chastened, patient and nervous money.