The alternatives

Though it's stating the obvious to say that real estate is a popular asset class – any limited partner, pension fund consultant, real estate professional or casual reader of The Wall Street Journal could offer the same opinion – a recent survey of institutional investors nonetheless manages to offer some insights on the issue.

According to The 2005-2006 Russell Investment Group Survey on Alternative Investing, average allocations to all alternative assets – broadly defined as hedge funds, private equity and real estate – are expected to reach record levels by 2007 across all geographic regions. Although hedge funds are expected to exhibit the most dramatic growth, real estate is also anticipated to become an increasingly important part of institutional portfolios.

“Although some regional differences exist, global allocations to real estate remain strong and are generally expected to increase by 2007,” noted Karl Smith, director of real estate for Russell Investment Group, in a statement. “This is not an unexpected result given the longer period of experience and familiarity many investors have with real estate.”

In North America, for example, the percentage of total fund assets invested in real estate is anticipated to rise to 7.3 percent by 2007, a slight increase of approximately 60 basis points from its current level. Interestingly, most of that growth will be fueled by pension funds according to the survey, as foundations and endowments anticipate slightly decreasing their current exposure.

The growing interest in real estate is, of course, having a dampening effect on return expectations. While investors expect real estate in North America to generate higher yields relative to the rest of the world (see chart), those expectations have declined since the previous survey in 2003. By contrast, in other parts of the world, notably Australia and Europe, return expectations have slightly improved, partially explaining why almost half of the respondents in North America anticipate increasing their allocations outside of their home region.

In addition to looking abroad, the survey results show that North American investors are increasingly looking towards non-core funds to boost returns. Commitments to core and non-core funds increased 25% from 2003 levels – non-core funds now account for approximately 20 percent of total commitments.

The survey, Russell's seventh biennial report, covered 327 large, taxexempt institutions.

FUNDS & INVESTORS

Cabot closes $450m industrial fund
Boston-based private equity real estate firm Cabot Properties has held a final close on $450 million (€367 million) for its second industrial fund, Cabot Industrial Fund II. With leverage, the investment vehicle will acquire up to $1.3 billion in industrial properties across the US. Earlier this summer, Cabot sold its first fund, which closed on $420 million in July 2003, to Dividend Capital Trust for $695 million. Cabot was originally formed in 1986 and was launched as a real estate investment trust in 1998. In 2001, the firm's senior principals, including managing partner Franz Colloredo-Mansfeld, sold the publicly traded business, Cabot Industrial Trust, for $2.1 billion.

Investcorp posts year-end results
Global investment firm Investcorp recorded a “record” year in its real estate portfolio for the fiscal year ended June 30, 2005, according to a statement. The firm sold 28 properties to generate $419 million (€342 million) in profits and acquired 22 new properties, investing $241 million in equity, including a number of opportunistic investments, a new strategic sector for the firm. Overall, Investcorpdistributed approximately $1 billion to its investors from its various business lines, including private equity, real estate and fund of hedge funds. At year end, the firm managed approximately $9.5 billion of alternative assets.

Lehman raises $3.5bn for two funds
New York-based investment bank Lehman Brothers has raised $3.5 billion (€2.9 billion) for two separate real estate funds. The firm's second global opportunity fund, LehmanBrothers Real Estate Partners II, closed on $2.4 billion and a mezzanine debt fund closed on $1.1 billion. Approximately $600 million of the fund totals came from Lehman Brothers itself. According to Raymond Mikulich and Mark Walsh, co-heads of Lehman's Real Estate Private Equity Group, approximately $1.4 billion has already been committed from both funds. The bank's previous opportunity fund closed on $1.6 billion in 2001.

Colony raising $1.5bn for two funds
Los Angeles-based private equity real estate firm Colony Capital is currently raising $1.5 billion (€1.2 billion) for two separate funds. Colony Investors VII, the firm's seventh opportunistic vehicle, is currently in the market with a target of $1 billion. Colony is also in the process of raising $500 million for its first lower-return investment vehicle, Colony Realty, which will focus on core-plus and valueadded transactions. Although Colony declined to comment, a source close to the fundraising noted that the firm has already invested or committed a significant amount of the capital and may be out in the market with another vehicle early next year.

Apollo to target NYC
New York-based private equity real estate firm Apollo Real Estate has formed a partnership with Carver Federal Savings Bank and the Harlem Congregations for Community Improvement to acquire and develop real estate projects in upper Manhattan. The partnership allows Carver to be part of the underwriting syndicate for any Apollo deals in the area; HCCI will provide job training through its Construction Trades Academy and will try to find construction and permanent jobs generated by Apollo's real estate projects. Richard Mack, Apollo managing director, noted that the firm is looking to invest approximately $300 million (€248 million) of equity in the five boroughs of New York City over the next few years. Earlier this summer, Apollo announced it was the lead investor in a $500 million redevelopment project in the Flushing neighborhood of Queens as part of a joint venture between The Rockefeller Group and TDC Development and Construction.