Firms set to target real estate debt

Debts in the distressed property market are being targeted by private equity firms amid a dearth of corporate buyout deals.

Real estate executives predict buyout firms will be among those hunting “loan to own” debt deals and distressed investments.

Blackstone, one of the world’s largest private equity firms, was in talks last month to take control of CalWest, an industrial real estate portfolio owned by private equity investor Walton Street.

It has also been buying junior debt with a view to taking over the properties in the event of a default.

The CalWest acquisition is set to make Blackstone one of the biggest owners of warehouses and industrial real estate in the US – despite being a relatively small player in the market before the global financial crisis, according to the Wall Street Journal. Blackstone was unavailable for comment.

Blackstone now has $13bn in real estate funds to spend after bulk buying properties at below market prices, and now has real estate assets worth $48bn.

Its rivals have also increased their presence in real estate to become fully fledged asset managers, and are betting on a property market recovery. The Carlyle Group reached $2.3bn for its latest real estate fund late last year and has steadily built up its presence in the sector over the last few years.

Kohlberg Kravis Roberts, one of the early pioneers of global private equity, continues to diversify into real estate and has made a number of appointments to its specialist team in recent years.

In March last year, KKR hired Ralph Rosenberg, a real estate executive from Eton Park Capital Management, to lead the firm’s fledgling property team.

US firms dominate the global private equity real estate market. According to data provider Preqin, Blackstone Real Estate Partners VII, targeting over $10bn and still fundraising, is set to become the world’s largest private equity real estate fund.

It is significantly bigger than its nearest rival, the $2bn Rockpoint Real Estate Fund IV, managed by US firm Rockpoint Group.

Axa Real Estate’s European Diversified Property fund, at €1.5bn, is currently Europe’s largest, according to Preqin.

However, real estate-focused fundraising has fallen dramatically this year. Funds raised by private equity firms have raised just $16.6bn compared with $54.8bn for the whole of last year.

Wayne McArdle, a real estate M&A partner at US law firm Gibson, Dunn & Crutcher, said: “We are seeing less of the pure corporate private equity firms moving into real estate. Blackstone has been in the real estate sector for years, and has been very smart.

I don’t think this is a market for a newcomer unless they have an established real estate investment platform.”

During the first quarter of this year, there were four real estate buyouts worth $1.6bn in total, compared with $312m completed in the third quarter of last year and $253m in the fourth.

The corporate buyout market has been stifled by a lack of senior debt, which was previously used to engineer high rates of return on private equity investments.

One market executive said there were “maybe two or three” banks providing leverage for real estate deals in the London market, while “many still considered property loans toxic assets”.

According to market executives, private equity firms are hoping to address the financing gap by putting more equity into deals, while others have turned to making debt investments in real estate.

Robin Priest, a principal with Alvarez & Marsal Real Estate Advisory Services in London, said real estate debt funds were well placed for success: “You can achieve high margins and people will praise you for doing it.

Risk is relatively low. Both senior and mezzanine debt funds are likely to deliver handsome returns.”

But in Europe real estate deals have been hit by the eurozone sovereign debt crisis as investors struggle to make growth predictions for European assets.

David Boyle, a portfolio manager for Morgan Stanley Alternative Investment Partners Real Estate Fund of Funds group, said the US property market is viewed more favourably than that of Europe: “The market is bullish on the US, though more negative on Europe, except in London.”

Europe’s major cities, including London and Paris, have largely defied the global property downturn, and continue to enjoy “safe haven status” among global investors.

Subsequently, prices have remained high. The demand in these over-populated cities has also helped to drive up prices and provide attractive yields to prospective investors.

Boyle said: “There is continued demand for core real estate in well-located areas. These assets are trading at pre-crisis levels, and some investors are treating these assets as fixed income.”

Source: http://www.efinancialnews.com/story/2012-07-02/firms-set-to-target-real-estate-debt?mod=sectionheadlines-IB-PE