Year of opportunity

Few expected the mood to be exuberant at two of the biggest real estate conferences in the US and Europe last month. As speakers from across the globe offered their verdict on capitalism's darkest hour for nearly a century, there was only one sentiment that accurately summed up most peoples' feelings there and then: doom and gloom.

With repeated predictions that real estate prices were set to drop by as much as 20 to 25 percent in mature European countries and the US, industry professionals admitted their attention was focused very much on ensuring existing assets were in good order.

At the annual Pension Real Estate Association conference in Chicago, the speed at which Lehman Brothers, AIG, Fannie Mae and Freddie Mac had failed, and at which Goldman Sachs and Morgan Stanley had ceased to exist as investment banks, had cemented uncertainty about what the future could hold.

At Expo Real in Munich, the shock of the €50 billion government and private sector bailout of one of the world's largest commercial real estate lenders, Hypo Real Estate, was palpable. The surprise resignation of its chief executive on the second day of the conference only added to the subdued atmosphere.

Yet for all the immediate pessimism about the state of the world's economies – and the consequences for their real estate markets – there was an underlying optimism about opportunities to be had in the near future. There was, in essence, light at the end of the tunnel.

During a panel debate hosted by PERE's associate editor Zoe Hughes at Expo Real, managing directors from the private equity real estate firms, GE Real Estate, ING Real Estate, The Carlyle Group and Morgan Stanley Real Estate, all agreed 2009 would be the “year of opportunity.”

Real estate debt is expected to be one of the biggest opportunities in the short-term, with GE Real Estate's Rainer Thaler saying the firm had already shifted its strategy to a pure debt one in Germany for the immediate future. “The debt opportunity is extremely attractive,” he said.

The amount of commercial real estate debt that is due for maturity over the next two years will be a huge driver of that opportunity, Carlyle's Dr Wulf Meinel added.

According to Kevin Lynch, co-founder of real estate consultants The Townsend Group, returns on debt investments are now hitting double-figures. “You will be getting compensated at a higher level buying the debt, than you ever will be for buying the individual property,” he said at Expo Real.

Fund managers PERE spoke to at both events confirmed the risk-profile of their investments had already dramatically changed. They said fund managers were now faced with an option of continuing to pursue the same level of risk as before in the hope of achieving greater returns, or continue targeting the same returns in order to significantly reduce their risk exposure. One firm said it was happy to accept the same, or slightly lower returns, in an effort to “greatly reduce our risk”.

On both sides of the Atlantic though, almost all agree the real opportunities will come in 2009.

Few, however, were confident enough to predict how long those opportunities would last. Only Thaler suggested mispriced opportunities, such as in debt, could last well in 2010 telling PERE and its panel the current distress could last for the next 24 months.