Alternatives

Managers expecting lower returns from real estate sector

At this later stage in the real estate cycle, investors are even more selective in view of an expectation of lower returns in the future, which is adding further momentum to the mergers and acquisitions trend, real estate managers say.

“Five years ago, it was easier investing in real estate because prices were much lower. Today's environment is more challenging, and investors have to be more discriminating in what they pursue,” said Kevin White, director and head of strategy for the Americas in the New York office of Deutsche Asset & Wealth Management.

“In Deutsche Asset & Wealth Management's view, we forecast real estate returns to still be strong, just lower than in the past,” Mr. White said, “I would maintain that on a relative basis, real estate still holds up very well, although maybe not as rewarding as in the past. Historically the average return over the past 30 years has been 9% on an unlevered basis. Going forward, we believe it will be closer to 7% to 7.5%.”

As the real estate investment cycle matures, Deutsche Asset & Wealth is recommending more of a portfolio weighting toward office and industrial, “which historically have done well in the later stage of the (real estate) cycle,” he said.

The apartment sector has an extremely strong demand story from falling home ownership rate, Mr. White said. “It's also seen the most construction and pricing is more aggressive,” he added.

Real estate managers without the real estate sector expertise that investors seek are stretching to offer those services, noted Sean Burton, CEO of Los Angeles-based real estate manager CityView.

“Some real estate firms are stepping out of their comfort zones to go to locations or into products they have not done before,” he said.

Other managers are acquiring the expertise by hiring real estate investment professionals or acquiring a specialist firm, noted Irwin A. Kishner, a partner at law firm Herrick, Feinstein LLP, New York.

“Either managers are wholesale buying banks or boutiques or they are hiring talent from competitors. It's a little bit of musical chairs,” Mr. Kishner said.

When alternative investment firm TPG LLC acquired a 75% stake in a $2.5 billion loan portfolio from Deutsche Bank's special situations division, industry insiders said one of the deal's attractions was that the portfolio's real estate investment team came with it. TPG used the loans on U.S. properties to form a real estate investment trust, TPG Real Estate Finance Trust, and the 11 origination and investment executives left Deutsche Bank to join the new REIT. The REIT forms the basis for TPG's debt origination and acquisition platform, according to information on TPG's website.