Private Equity Sees Commercial Real Estate Staging Rebound

Thursday, 02 Feb 2012 09:53 AM

By Jacob Wolinsky

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Many analysts have recently discussed a new player in the housing market: big hedge funds.

Not only are hedge funds seeing a pickup in housing, but also housing stocks have staged a massive rally. Many funds are buying residential real estate.

However, many fund managers still see a long way ahead before home prices hit bottom.

Now, another large type of investment firm is investing heavily in other types of real estate.

Private equity firms are buying commercial real estate (CRE), betting on a recovery in that asset class.

BlackStone Group, with more than $150 billion in assets under management, is the fifth-largest private equity firm in the world. The company is now also one of the largest owners of shopping malls. The firm has invested close to $30 billion in real estate and is making bullish bets on the sector.

The firm has been struggling as vacancy rates remained high during the past few years due to the recession. However, that trend is starting to turn around as the economy recovers and tenants need to rent space.

In general, CRE might be a big place for private equity firms to start investing. Colleagues at midsize private equity firms have been buying properties at distressed prices for more than two years.

There are likely several reasons why the industry is finding these investments attractive.

According to Moody’s, CRE has dropped close to a whopping 50 percent since its peak in early 2008.

This has created many forced sellers. Some of the forced sellers include many big retailers are getting rid of stores, such as Sears.

The Federal Reserve is doing everything to boost real estate. Fed Chairman Ben Bernanke has kept interest rates near zero since 2008 and plans to keep it that low until late 2014. A large part of the reasoning is to lower mortgage rate and boost housing. With many people out of jobs, and homeowners underwater, residential housing has yet to recover.

However, private equity is avoiding this segment and operates in a different manner. They raise money from investors who want good returns on their money. Stocks have been extremely volatile, and that is frightening investors away.

Additionally, private equity firms are hesitant to take risks of investing in small businesses during a very uncertain economic time period. Real estate is cheap and offers a better return than money in a bank earning 1 percent.

Private equity firms have long lockup periods for investors. It isn’t atypical for firms to have seven-year timeframes where investors cannot redeem their money. Sometime over the next seven years, there should be inflation, possibly very high inflation. Housing is one of the best ways to profit from raising prices.

Although for now, most big private equity firms (besides BlackStone) don’t seem to be placing a lot of bets in the sector, expect to hear more about big private equity firms pouring money into CRE in the near future.


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