Real estate best US distressed opportunity in 2010

Distressed real estate opportunities in the US are attracting attention across the alternatives sector, with property branded the best asset class for investment this year.

A survey of 100 private equity, hedge fund, proprietary trading desks and institutional investors voted US real estate the best distressed opportunity in 2010, with 41 percent of respondents backing the claim. That compared with just 19 percent in the previous year’s study.

Achieving 20 percent returns will be increasingly challenging given the run-up in most asset prices during the second half of 2009. Teri Stratton, senior vice president, Macquarie Capital

Real estate was head and shoulders above other sectors, according to the report, by Debtwire, FTI Consulting, Macquarie Capital and the law firm Bingham McCutchen. Distressed consumer product, financial services and industrial sector opportunities followed property, all garnering 33 percent.

Ron Greenspan, senior managing director of advisory firm FTI Consulting, warned though the commercial real estate cycle still had a “way to go”. He added that the unwillingness of many US banks and financial institutions to lend or securitise new mortgages “amplify the potential refinancing and default crises ahead. But this vacuum is also starting to attract private investment capital into the space.”

Despite appetite for distressed deals across all sectors, investment professionals are split on expected returns. Roughly four in 10 executives said they were targeting returns of 10 percent or less in 2010, with 13 percent saying they expected returns of less than 5 percent. In contrast, a quarter of those questioned said they expected 20 percent-plus returns – with half of all respondents targeting returns of more than 15 percent.

With a majority of professionals favouring second lien loans, above first lien loans, as investments, Teri Stratton, senior vice president, Macquarie Capital, said distressed investors would “chase yields more aggressively and turn their focus down the capital structure into riskier asset classes and riskier issuers.

“However, achieving 20 percent returns will be increasingly challenging given the run-up in most asset prices during the second half of 2009.”