US real estate to return in ‘snap’

As large amounts of equity sits on the sidelines waiting to be invested, Encore Equities warns a recovery could take place much faster than people expect.

The US real estate markets could experience a “snap” recovery thanks to large pools of equity sitting on the sidelines waiting to pounce on distressed opportunities, according to Dallas-based Encore Enterprises.

Bharat Sangani, co-founder and chairman of the real estate investment firm, said the dislocation between the number of assets for sale in the market and the scale of capital waiting to be deployed would ensure a quick recovery once the investment community sensed the timing was right.

“There are a lot more people with capital who will be in play this time round,” he told PERE. “The moment people sense opportunity they will jump in. If people wait too long to get into the race it might have changed significantly.”

The moment people sense opportunity they will jump in. If people wait too long to get into the race it might have changed significantly.

Bharat Sangani, co-founder and chairman of Encore Enterprises

He said waiting for the absolute bottom of the market could result in lost opportunities. “If the market recovers as I believe, one day the bottom will turn into a peak and that could be sooner than people expect.”

Encore raised $150 million in equity commitments for its first fund, Encore Opportunity Fund I – a family and friends vehicle that closed in June, and is hoping to secure $150 million, and possibly up to $250 million, for its follow-on vehicle, Encore Opportunity Fund II.

Fund I is focused primarily on acquiring assets from the US banking regulator, the Federal Deposit Insurance Corporation (FDIC), particularly in the hospitality, multi-family and retail sectors. Fund II, which can invest in Fund I, will develop and acquire assets in the same sectors and also co-invest alongside small separate accounts involving Encore’s limited partners. The firm hopes to close Fund II by early 2010 at the latest.

Encore co-founder and chief executive officer Patrick Barber said the firm was seeing some good quality product come to market at roughly 50 percent replacement cost, with existing cash flow. But he noted, the volume was small. The firm, he explained, had looked at more than $4 billion of possible transactions, bid on more than $2 billion worth but was likely to successfully close on just a “few hundred million. That’s what’s needed in this environment,” he said.

“This is probably the first time since 1938 in which every single real estate sector has been completely demolished to the level that there can be no other place to go but up. The question is when will it go up,” Barber said.

Founded in 1999, Encore has been involved in more than $1.2 billion of transactions, involving 78 deals. The firm said it has generated IRRs of 57 percent over the past decade. In 2007, Encore sold all but two of its hotels, worth several hundred million dollars, including selling a portfolio of 29 hotels to Goldman Sachs’ Whitehall Street funds and its asset management arm, the Archon Group.

Barber said the firm was currently involved in two hotel projects in Alabama and several multifamily acquisitions in the South East of the US, including Texas, Mississippi and Louisiana. The firm has also targeted multifamily deals eligible for financing by the US Department of Housing and Urban Development (HUD).