It's been a sellers' market.
Real estate managers went on a selling spree, taking advantage of attractive prices while cutting back on investment. As a result, total U.S. institutional tax-exempt assets run by real estate managers were flat for the one-year period ended June 30, growing a mere 0.6%, compared with an increase of 9.6% for the year ended June 30, 1998, and an increase of 8.8% for the year before that, according to Pensions & Investments' annual survey of real estate managers.
And assets invested in what a year ago were the hottest investment vehicles - real estate investment trusts and commercial mortgage-backed securities - both landed in negative territory, off by 0.1% for REITs and 4.5% for CMBs, reflecting downturns in those markets.
While most of the top 10 managers in the surveys had fewer U.S. tax-exempt assets under management in the year ended June 30 than they did for the previous year, some bucked the trend.
J.P. Morgan moves up list
J.P. Morgan Investment Management Inc., New York, which moved up to second place from third place last year, added $3.4 billion. The bulk of the money came from AT&T Co., which outsourced its real estate program. It gave Morgan $2.9 billion to run a manager of managers real estate program for it, said Julie Brenton, vice president of J.P. Morgan. The remainder came from new capital commitments and acquisitions made on behalf of separate account clients, she said.
"We've been very active this year and have invested $1.8 billion so far. We've also done some very big asset sales, such as a $300 million building on Third Avenue in New York," added Ben Gifford, chief investment officer for direct investment at Morgan.
The firm more than doubled its REIT business. But because REITs were down 10.18% for the one-year period, as measured by the NAREIT index, the overall total of REIT assets eroded.
Lend Lease picture
At other big real estate managers, there was a focus on selling as well as on adding new assets. Typical was Lend Lease Real Estate Investments Inc., Atlanta, which ranked third in the survey, with tax-exempt assets slipping to $13.2 billion from $13.8 billion last year, when it ranked second. Paul Dolinoy, president, said the firm sold more than it acquired during the survey period. In addition, it has acquired Boston Financial's $1 billion in assets, but those weren't counted in the survey because the deal hasn't been finalized.
In the year ended June 30, the firm saw a considerable amount of turnover.
"We saw an opportunity and sold around $4 billion worth of assets for clients who were in a disposition mood," Mr. Dolinoy said.
At the same time, the firm was awarded around $4 billion in new assets, although that includes taxable as well as tax-exempt money.
In tax-exempt, it added several new pension fund clients, including $400 million from the $19 billion Tennessee Consolidated Retirement System, Nashville; $300 million from the $24 billion Alaska Permanent Fund Corp., Juneau; and $80 million from the $5.2 billion Public Employee Retirement System of Idaho, Boise. It also received additional allocations of $300 million from the $8.3 billion Kansas Public Employees' Retirement System, Topeka; and $100 million from the $23.5 billion Los Angeles County Employees Retirement Association, Pasadena.
Mr. Dolinoy observed: "It's a good time to invest in core funds, because they produce high income. We also like opportunity funds, provided there is good local knowledge behind them. In addition, we have just raised over $350 million in a global opportunity fund and have concluded three deals for it in Asia and Europe." The fund is expected to close at $750 million.
There are also good opportunities in the CMBs market, because it is possible to find equity-like returns on the securities, according to Mr. Dolinoy.
The firm also has been active in REITs. Lend Lease, like many other managers, believes REITs are a good buy now because they are trading below their net asset value.
At Heitman Capital Management, Chicago, there were also a lot of redemptions by clients, which caused U.S. tax-exempt assets to slide to $8.9 billion from $9.6 billion the year before. The firm ranked fifth this year, the same as last.
"We've been doing what our clients asked and selling them out of commingled funds, which have matured after a lifespan of 15 years or so," said Mary Ludgin, president and chief executive officer.
But Heitman is on track to do $1 billion in new investments for calender year 1999, said Ms. Ludgin. She added that Heitman didn't do a lot of buying last year because the firm considered prices too high. But it's actively engaged in making new investments now. These include joint ventures with REITs, and a recently launched Central European property fund, which will invest in Hungary, Poland and the Czech Republic. It is due to close in the first quarter of 2000.
The scenario was similar at LaSalle Investment Management Inc., Chicago, which ranked eighth in this year's survey, down from seventh last year.
"The first half of the year was a very attractive time to sell assets because of the large amount of capital available to make acquisitions, so we took advantage of it," said Lynn Thurber, co-chief executive officer. "It was also an opportunity to complete the liquidation of old commingled funds we had been running since the 80s."
LaSalle, like many managers, has also been expanding its investment activities overseas, raising strategically focused funds for separate accounts and commingled funds. These are also attracting a lot of interest from European investors, she said.
Another vehicle that is of growing interest these days, according to Ms. Thurber, Ms. Ludgin and other managers is value-added funds. "We take a B asset or one that's recovering and reposition it by adding amenities such as a parking garage or improved public spaces, which allows rental increases. These are very attractive for separate accounts," Ms. Thurber said.
At The RREEF Funds, San Francisco, which ranked sixth in the P&I survey - the same as a year ago - total U.S. tax-exempt assets fell to $7.8 billion from $8.9 billion the previous year.
Many RREEF clients, like those of other managers, took back their profits. Some will reinvest them with the same real estate manager while others will look for new opportunities.
"We sold more than we bought, and that was planned," said Don King, managing principal.
"We'll still be selling, because we have a number of large assets to dispose of, coming from commingled funds. But it's also a good time to be buying, even though we're not seeing the bargains of three years ago."
Mr. King, like many of his peers, said it's a good time to buy REITs, since their prices have been down. He has been advising clients to add REITs to their allocations. Additionally, the firm has been hired to manage REITs by new clients, which include the Robeco Global Fund, Rotterdam, the Netherlands, one of Europe's largest mutual funds.
RREEF also likes the value-added concept and is beginning to raise money for a $250 million value-added fund, with investments scheduled to start in the first quarter of 2000. Mr. King expects returns will range from 15% to 18%, with a maximum leverage of 50%.
"We want to keep it small so we won't feel we have so much money we have to throw it out in the market. Instead we'll do a series of these funds, after we have completed the first one," he said.
Bucking the trend
C.B. Richard Ellis Investors, Los Angeles, has bucked the trend, bringing the firm's ranking to number 12, up from 13 last year, with assets climbing to $4 billion by June 30, from $3.6 billion a year earlier.
Bob Zerbst, chief investment officer, said the firm took in more money than it sold, even though it disposed of more than $520 million worth of property. But it took in new money through a new allocation from the $99 billion California State Teachers' Retirement System, Sacramento, and around $160 million from the Shell Pension Fund, Rijswijk, Netherlands, plus the entire $900 million real estate portfolio from BP Amoco PLC, London.
One of the most dramatic changes in the rankings was Starwood Capital Group LLC, Greenwich, Conn., which dropped to 29 from 18, while assets skidded to $1.5 billion from $2.5 billion last year.
Elizabeth Behnke, vice president investor relations, said the drop was due to liquidations.