Real estate opportunity funds are proliferating as the real estate opportunities are slackening.
Guess what? Here comes the pension funds.
Pension funds and other investors have poured $5 billion into these funds since 1990, according to The Townsend Group, a Cleveland real estate consulting firm. A lot of that money has been invested or committed since 1992, the generally accepted bottom of the real estate cycle.
Among the recent opportunity fund closings and capital raising efforts:
The Tiger Real Estate Fund L.P. closed last month, raising $784 million from 28 investors, said Mary Harris, director-investor relations for Tiger Real Estate Partners, New York.
Pensions & Investments learned some of the investors include the $28 billion State Teachers Retirement System of Ohio, Columbus, which committed $60 million; the $17 billion Oregon Public Employes' Retirement Fund, Salem, which committed $74 million; and the $60 billion New York State & Local Retirement System, Albany, which committed $75 million.
Industry sources said the pension funds for IBM Corp. amd AT&T Co. also committed to the fund. Telephone calls to representatives from those funds were not returned.
Brazos Fund L.P. closed this month, raising $150 million from pension funds, endowments, family trusts, insurance companies and commercial banks. Dallas-based Brazos L.L.C. will advise the partnership and will focus on distressed mortgage loans, foreclosed real estate and high-yield mortgage-backed securities.
Equity Institutional Investors Inc. expects to close at the end of June with $500 million for its Equity Opportunity Partners IV. The general partner of the fund is an affiliate company of noted vulture investor Samuel Zell.
Japanese financial institutions are expected to be an important source of properties for EOP IV, according to Donald Phillips, chairman of Equity Institutional Investors, Chicago. Mr. Phillips contends that Japanese banks and insurance companies will become more aggressive with foreclosing on delinquent borrowers and selling the properties.
Investors will have the option of taking the fund public as an exit strategy, said Mr. Phillips.
There is consensus that handsome real estate returns are still available. But the days of the best deals are past and return projections - most exceeding 20% -may be overstated in today's property environment, a recent panel of investors at the conference of the Pension Real Estate Association concluded.
"There is more money chasing deals, and the result is to bid up values," said Michael Humphrey, a consultant with Townsend. "Some (managers) will be successful, but they will have to do the business right.
"The successful ones will be able to source (properties) through relationships with institutions, add value through asset management and to be effective sellers," said Mr. Humphrey.
The first generation of opportunity funds that sought to take advantage of the 1980s excess focused on bank and insurance companies that were pressured to sell.
But many of these institutions have cleaned up their balance sheets or have been able to hold on to properties and are now selling in a stronger market.
"That opportunity (bulk portfolio sale) isn't as prevalent," said Terrance Ahern, principal with Townsend. "How much opportunity remains with all that capital available?"
Mr. Ahern noted that George Soros recently closed down an opportunistic real estate fund for lack of opportunity.
"A lot of capital has been raised, and in making the decision to invest, the investor has to be comfortable with the strategy and the ability of the manager," said Mr. Ahern. "That level of scrutiny is more important today than 18 months ago."
The reputation of Tiger's principals - former Morgan Stanley Realty managing directors Paul Kazilonis and William Walton - was built on the large bulk portfolio purchases. But their new venture will focus on small deals from $5 million to $40 million, said Ms. Harris.
The fund will invest in all property types and geographic regions - 25% of the fund can be invested abroad - and the target rate of return is in excess of 20%, said Ms. Harris.
Tiger will collaborate with local property companies, and these companies will co-invest with the partnership. The average holding period of a property will be two to five years, she said.
Ms. Harris acknowledges that Tiger's strategy isn't one typically associated with the opportunistic label. "What has happened is we've taken this term and generalized," she said. Most investors hear opportunity and assign big portfolios and bulk sales to it.
In addition to the Japanese financial institutions and U.S. banks and insurance companies, Messrs. Humphrey and Ahern believe commingled funds and some real estate investment trusts formed in 1993 and 1994 will be a source of deals for opportunity funds.
Mr. Humphrey also believes the large volume of five-year and seven-year bullet mortgages maturing this year and next will be a source of properties for the opportunity funds.
"There is going to be a percentage of those loans that won't be refinanced because asset valuations don't support the value of the loans," said Mr. Humphrey.
"The REIT vehicle has been used liberally," said Mr. Ahern. "There are a number of commingled funds and REITs in need of restructuring or liquidation of assets," said Mr. Ahern. "That is where the opportunities are."
