NEW YORK - Though a good deal of money is still chasing real estate - thanks in part to turmoil in corporate America - pinpointing the right sectors and regions for investment has become increasingly difficult, according to panelists at Information Management Network's Real Estate Opportunity Fund Investing held here last week.
Some panelists argued that opportunities outside of the U.S. might be the best in the current market, specifically in Europe and Japan, as economic conditions in the U.S. are still uncertain.
Members on a panel focusing on the domestic outlook were rather ambivalent about the supposedly improving economy. As one panelists said, "We are in a place where nobody is certain of the future." Others noted that the current situation is somewhat of an aberration because of the lag effect.
"The consumer has not yet felt the effect that business is seeing," said one panel member. "The economy is sort of bouncing around on the bottom."
This uncertainty has not only been driving investors into the real estate market, but has triggered a flight to quality within real estate. According to one of the panelists, it has become easier to sell top-tier real estate, as buyers prefer "well-leased and well-located companies." However, the panelist said that in the second-tier market, it usually takes time for buyers and sellers to come to an agreement.
Most panelists agreed that, though there is still a lot of money from opportunity funds and foreign capital, it has been getting harder and harder to find the good deals and to identify what sectors will eventually result in the 20% area returns. One panelist said that investors must be "real choosy" with the assets that they are buying, and that instead of relying on market growth for significant returns, they must look at cash flow.
The big picture
In the panel on the global outlook, participants were rather bearish on the U.S., while they were surprisingly more positive in their view of Europe and Japan.
Richard Georgi, a managing partner at Soros Real Estate Investors, said the risk has increased domestically because personal debt levels have skyrocketed, and people have taken to cashing in on their home equity and stocks.
In direct contrast, there is a fair amount of domestic liquidity in Japan, something that has been supporting the country's economy despite its other troubles. Panelists noted that the real estate debt and securitization markets are beginning to gain ground as people use their savings to invest in sectors that would give them yield.
Though there is zero growth expected in the near term, participants in the panel pointed out potential opportunities in distressed assets in Japan, as financial institutions transfer their non-performing loan portfolios to investors. Andrew Kassoy, managing director at CSFB Real Estate Capital Partners, said his company is finding opportunities in the "restructuring" - buying undervalued assets - as opposed to betting on Japan's economic growth.
The same theme of "recycling assets" is present in Europe as governments and corporations transfer their assets to the private sector. Panelists said that more and more corporations are starting to look at selling non-performing assets on their balance sheets to transform their earnings. And when corporations make general policies to sell their real estate portfolios, this allows real estate investors to move in and buy cheaply.
Some speakers prefer the European markets because the average building is older, so that there are opportunities to develop properties and create demand. Also, although there are supply/ demand issues caused by the tech sector implosion, the effects abroad are not as significant as in the U.S.
The long-term economic outlook for European real estate is also more positive because of some economic indicators, speakers argued.
Cited from a Deutsche Bank research report distributed at the conference, "Unlike the U.S. economy, Europe was some way from the peak of the economic cycle when the downturn struck. Unemployment remains high, leaving room for further above-trend growth (although this may be dependent on further deregulation of labour markets). There is no imbalance in domestic saving or external payments. It can be argued that the beneficial effects of technological developments that drove U.S. growth in the second half of the 1990s are yet to be fully felt in Europe."