Maturing debt is the number one concern among private equity real estate GPs, according to a survey.
Ernst & Young says in its 2009 Market Outlook –Trends report that mortgage financing and the ability of fund sponsors to refinance maturing debt on commercial properties in the next 12 to 18 months is the single most important preoccupation in today’s market.
It says in addition to refinancing risk, the ability to procure acquisition financing and an overall deleveraging of fund portfolios occupied the fourth and fifth highest priorities, respectively.
“It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs it appears, there is still very little if any lending taking place in the real estate industry right now,” said Gary Koster, head of the real estate fund services practice. “Our survey suggests that fund sponsors are not obtaining non-recourse financing on new deals.”
Another key concern for fund sponsor respondents centered on valuations. According to the survey, capitalization rates for stable income-producing commercial properties in the US are expected to continue to expand this year furthering the value declines experienced in 2008. Of the fund sponsors surveyed, 41 percent indicated that cap rates would increase by up to 100 basis points with another 33 percent of respondents indicating that cap rates would increase by more than 100 basis points.
Koster said: “Two years ago, values were based on peak earnings at peak multiples in 2007. Today our survey suggests that values this year may reflect declining earnings at depressed multiples.” “The great concern for 2009,” he added, “is declining real estate fundamentals and their impact on net operating income.”
The survey found 92 percent believe that there will be no economic recovery in the US until after 2009.
Fund sponsors indicated that raising capital for a new fund is the second highest strategic priority for sponsors in 2009. “During the past five years capital was plentiful and fund sizes grew dramatically with each new raise, but now we are going to see fewer and smaller funds coming to market,” Koster concluded.