The grass is always greener …

When Starwood Capital and Colony Capital announced plans to launched listed REITs in a bid to target distressed debt opportunities, it was seen by private fund managers as a response to the global freezing of the fundraising environment.

The move was hardly surprising. Since the start of the year, just $13.4 billion has been raised in private equity real estate funds globally – a fifth of the total raised in 2008 and 15 percent of what was raised during 2007, according to PERE magazine.

That compares with US real estate investment trusts raising $18.9 billion in fresh equity between January and June this year alone – more than the amount raised for the whole of 2008, and just shy of the capital raised during the first six months of 2007.

However it’s not just private fund managers who are wondering whether the grass is greener on the public side of the fence.

This week, the Wall Street Journal revealed that one of the largest REITs in the US, Vornado, had launched a private equity real estate fund to target distressed properties, particularly in New York and Washington DC. Vornado Capital Partners is targeting $1 billion and opportunistic returns.

Public capital may currently be deemed less expensive to raise than private, but Vornado’s play will offer the REIT some distinctly attractive opportunities, not least in terms of flexibility.

Just a handful of REITs run private funds, yet private equity real estate vehicles are often seen as great platforms for taking advantage of distressed cycles. While REITs typically specialise by property sector and/or geography, private funds can have a much broader mandate investing in a variety of food groups. Being private also brings with it some protection from the reporting rigours of public life, something that could be needed with distressed assets that will be unable to generate cash flows for years to come.

The Journal story prompted some criticism from readers about Vornado’s omission of debt in its investment strategy. With distressed debt expected to be the best short-term opportunity, many private fund managers are eagerly eyeing this space for deals. Yet Vornado is playing to its strengths: be those office and retail in New York and Washington DC. Vornado declined to comment.

The fundamental question remains though whether Vornado will be able to attract investor interest in its private foray. In the wake of the credit crisis, limited partners in commingled funds are asking whether this structure is the best platform for investing in real estate. When a significant number of established private funds are having to reduce their fundraising targets or freeze fundraising altogether, it will be interesting to see if the grass is actually greener on the other side.