Last week, executives with Principal Real Estate Investors LLC, Des Moines, Iowa, met in Australia to discuss a proposal for the firm to assume the asset management of US$900 million Lend Lease US Office Trust.
"By Jan. 1, if not sooner, there won't be a Lend Lease Real Estate Investments," said a source close to the deals.
At least one smaller real estate manager also exited the real estate business during the period.
PMRealty Advisors Inc., Newport Beach, Calif., left the business after failing to find a buyer. As news of its search for a new owner filtered through the industry, PMRealty hemorrhaged key staffers and clients. Its largest client, the $12.4 billion Public Employees Retirement System of Nevada, Carson City, moved its $260 million to INVESCO Realty Advisors, Atlanta, in November. INVESCO managed $475 million in private domestic real estate equity for the system prior to the portfolio shift.
J.P. Morgan Fleming also gained PMRealty's assets from a plan sponsor with which the J.P. Morgan Fleming had an existing relationship, said Joseph Azelby, managing director and head of real estate for J.P. Morgan Fleming. He declined to name the plan sponsor or say how much money was moved to his firm.
U.S. tax-exempt real estate assets under management at J.P. Morgan Fleming dropped more than $600 million during the 12-month period, but Mr. Azelby said the firm's "client activity is as good as it's ever been."
"I think we are seeing what we anticipated, which is continued and growing interest in the real estate asset class," Mr. Azelby said. "Given the interest rate environment, core real estate is particularly compelling."
What's more, the discussion about overpriced real estate concerns a small percentage of the properties on the market, he said. "The prices that are getting all the attention are the trophy properties with long-term leases in place that were traded like bonds when real estate was at an all-time low," Mr. Azelby said.
But, Mr. Azelby cautioned, everything in real estate is at the margins. "For most of 2003, the deal flow was not all that deep," he said. "In the second half of 2003, we'll see more product than during the first half."
LaSalle's Mr. Schaff agreed that the year ended June 30, was a period of increasing interest in real estate by institutional investors. LaSalle is 13th among real estate managers ranked by U.S. institutional tax-exempt assets. La Salle's global institutional business accounted for $10.6 billion during the period, Mr. Schaff noted.
Many of the first-time investors have been smaller or midsized pension funds, endowments and foundations, said Pat Halter, new chief executive officer in transition at Principal Real Estate Investors, ranking fourth on the list of real estate managers ranked by tax-exempt assets. Smaller foundations and endowments are more interested in core-based real estate investments.
"These are mainly investors who have not invested in real estate or not invested in real estate in quite a while," said Frank Schmitz, managing director, head of real estate equity.
But the growth in institutional interest doesn't mean gravy days for asset managers, Mr. Schaff cautioned.
During the next 12-month period, more midmarket players that did not find a niche market or grow to a more global scale might also be exiting the market, he said.
"We'll continue to see players try to evolve to a scale that will allow them to exist in a business in the United States and add global reach," Mr. Schaff said. "I expect to see more activity, although a lot has happened already." Some real estate advisory firms are already in the hands of large global institutions like ING Clarion, New York, and RREEF/Deutsche Bank Real Estate.
While some managers might be leaving the real estate business, others may diversify their offerings by adding real estate investments. Just two weeks ago, Bank One Corp., Chicago, announced it is buying real estate investment adviser Security Capital Research & Management Inc., Chicago, from GE Capital Real Estate, Stamford, Conn. Security Capital, which manages about $3.5 billion in real estate investments, will become a subsidiary of Banc One Investment Advisors, said David Kundert, Banc One president and chief executive officer. Security Capital is the sixth largest REIT manager in the P&I survey, with $1.7 billion under management. The deal is subject to regulatory approvals, but is expected to close by the end of the year. Terms were not disclosed.
"We see this as diversifying beyond stocks and bonds," Mr. Kundert said. "We have a limited presence: $150 million in separate accounts, but that's high net worth."
Purchasing Security Capital will give Banc One an entry into the real estate business, he said. "We've seen that institutional clients increasingly are moving to more sophisticated asset allocation mixes that moves beyond stocks and bonds and adds asset classes that don't correlate to one another, like hedge funds of funds and real estate," Mr. Kundert said.