Opportunistic and vulture funds no longer kings of the real estate investment market, experts claim

News - Banking

Written by Ray Clancy

Wednesday, 07 April 2010 08:38

Opportunistic funds are rapidly losing their status as kingpins of the distressed real estate market which could hurt their fundraising abilities in the next market cycle as banks get savvy with problem property debts, it is claimed.

While managers such as Blackstone and Orion Capital raised hundreds of billions of dollars to capitalize on the worst market slump in years, most have yet to find the cut rate deals seen after the savings and loans crisis of the 1990s in the US, according to analysts.

'The lesson learned by the opportunity funds in the 1990s was I should have bought more, the lesson learned by the banks was I should have sold less,’ said Struan Robertson, global co-head of Morgan Stanley real estate investment banking.

Opportunity funds will have to accept fierce rivalry and a much smaller role in the market from now on because it has got better at managing so-called dysfunctional phases, experts believe.

The result is that at the end of March, $194 billion of the cash raised by private equity real estate funds, including opportunity and distressed debt funds, over the past few years has yet to be invested, according to data from research house Preqin.

As the vulture funds have a typical life of seven years, including a three year investment period, managers may find the recession driven window of opportunity closes before they settle on new investment strategies, forcing them to return capital.

Fears abound that investors are growing impatient with the funds’ inertia and may shy from supporting new fundraisings, unless they are reassured their capital can be put to work. The Preqin data showed private equity funds raised $42 billion in 2009, the lowest annual amount since 2004.

Preqin senior real estate analyst Stuart Taylor said funds are typically more nimble than core asset focused pension and insurance funds, meaning they can quickly shift gears as the market adjusts and exploit emerging opportunities. ‘What opportunistic funds are increasingly doing to combat the situation in the market is to widen their scope. A lot of them are now incorporating debt or distressed asset strategies within the vehicles,’ he explained.

In Europe property consultancy DTZ estimates that the gulf between demand for real estate debt and credit offered by banks will grow to €115 billion in the next two years.

Funds are also looking beyond Europe for opportunities. According to a report from Clerestory Capital Partners nine out of 15 opportunity funds launched in late 2009 were focused on the Americas, four on Asia, and two on Europe.

Philip Feder, global real estate chairman at law firm Paul Hastings, said several fund managers were now ‘concentrating on the U.S. and Asia because of the current European malaise’. Major players including LaSalle Investment Management, JP Morgan and Bank of America’s Merrill Lynch are trying to tap new capital or invest funds in Asia.

Many sovereign wealth funds, typically big backers of opportunity funds, are also seeking to invest more independently through special mandates instead of pooling cash with others investors in vehicles they have no control over.