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More discussion needed over return expectations

With LPs increasingly seeking safety amid quality, core real estate assets, Falcon Real Estate president Jack Miller said it’s essential for all sides to have an honest debate about the type of returns they can realistically expect from real estate in the coming years.

Private equity real estate LPs and GPs should have an honest discussion about the type of returns they expect from their property investments following months of write-downs, according to Falcon Real Estate president Jack Miller.

Speaking to PERE, Miller said many investors were seeking safety in their portfolios with quality, core assets in key cities around the globe – but many were still hoping for opportunistic-type returns to help offset heavy losses of the past six months.

“Most people will want the higher IRRs, the 20 percent-plus returns, but they’re not necessarily willing to accept the risks involved to get those IRRs. You are not going to get 20 percent if you’re wanting core-type assets,” he said.

Urging a more “honest discussion” between all sides, Miller added: “Real estate hasn’t traditionally been about making oversize returns.”

Falcon is in the process of raising a $250 million US Opportunity Fund, that will target office and some logistics and retail in the 12 largest markets in the country.

Last year, the New York-based investment firm launched a family of four funds, called Falcon Americas Real Estate Opportunity funds, individually targeting Brazil, Colombia, Argentina and the US.

Following the credit crisis last September though, Falcon shelved plans for the Latin America-specific funds to focus solely on the US vehicle. Miller said the firm hoped to come back to the other Latin America funds once there was a “compelling reason to return”.

Falcon is also raising the Falcon KP Agribusiness Fund in a joint venture with Buenos Aires-based investment firm Knightsbridge Partners. The fund will invest primarily in agricultural land in Argentina, Brazil, Columbia and Uruguay.

Miller, a former manager of Chase Manhattan’s real estate investment division, said the five-year US Opportunity Fund would target between 12 percent and 15 percent IRRs.

Miller said Falcon would target distressed sellers struggling to find financing, but stressed: “It’s impossible to buy the market. You cannot buy an index. You have to respond to individual transactions, every deal and building has its own cycle.