Managers with capital to spend are waiting for prices to drop, and sellers that are not pressured to sell are staying off the market.
“This is not an environment in which you would want to be a seller,” said Xavier Gutierrez, senior vice president, capital markets, Phoenix Realty Group LLC, a New York-based multifamily housing investment manager.
More than one-third, 36%, of tax-exempt assets was invested in office properties as of June 30, increasing slightly from 35.3% in last year's survey. Timber increased a percentage point to 3.5% and single-family housing dropped to 0.5% from 2.7% in 2007. Retail dropped by nearly two percentage points to 15.8%, while the remaining sectors were fairly stable.
A number of real estate investment firms closed funds during the period, with the second quarter of 2008 among the most successful in terms of capital commitments. According to Private Equity Intelligence, a London-based private equity data research firm, $31.3 billion in real estate funds was raised in the second quarter, roughly the same amount ($31 billion) that was raised in the first half of 2007. North American-based real estate investment managers alone closed a total of 24 funds with a combined $18.7 billion in the second quarter.
Although the survey period ended with a bang, overall real estate fundraising has been down, said Claudia Faust, co-founder and managing partner at Hawkeye Partners LP, a real estate private equity firm in Dallas. Hawkeye takes stakes in real estate investment firms
“Definitely, capital raising has slowed down,” said Ms. Faust.
Some investors could not make real estate commitments because of the “denominator effect” in which falling performance in traditional asset classes caused an overallocation to real estate. Others opted to wait until valuations dropped.
“There is a lot of capital out there and the presumption is that there will be a number of transactions in real estate mainly in non-performing loans, CMBS (commercial mortgage-backed securities) and residential real estate,” Reznick's Mr. Farb said. “The hope is that the spigot will start to open and there will be an opportunity to make money.”
During the year ended June 30, well-capitalized managers became more attractive, said Keith B. Rosenthal, co-founder and president of Phoenix Realty. Those investors making commitments to real estate funds were very selective, he said. Managers had to have a demonstrated track record within their niches showing their success in challenging times, he said.
Meanwhile, the shifts in assets under management don't always tell the whole story. For example, TIAA-CREF's tax-exempt assets under management are down, but that's a result of investment managers taking an opportunity to sell assets, firm executives said. TIAA-CREF sold loans and securitized a $2 billion pool of mortgage loans, said Philip J. McAndrews, managing director and head of global real estate portfolio management at TIAA-CREF.
“It was not a shift out of the mortgage investment class,” Mr. McAndrews said. “We think we did very well because at the time spreads were tightening up and received competitive prices on the pool.”
Of the top 10 tax-exempt real estate investment managers, two managers had double-digit percentageasset jumps. General Motors Asset Management, New York, increased assets 19% to $13.4 billion and Des Moines, Iowa-based Principal Real Estate Investors LLC's assets were up 14% to $24.6 billion.
Tax-exempt institutional assets under management at Prudential Real Estate Investors, Parsippany, N.J., 9% to $38.9 billion.
“During that period, PREI (Prudential Real Estate Investors) closed a number of funds, both domestically and internationally, and expanded our open-end funds, primarily the PRISA series of commingled funds, closing 2007 with a record-breaking $7.5 billion of new fundraising,” Theresa Miller, Prudential spokes-woman, wrote in an e-mail response to questions.
What's more, total returns across Prudential Real Estate's portfolios increased its assets under management by $3 billion during the year-ended June 30, she stated. Prudential's commercial mortgage lending subsidiary, Prudential Mortgage Capital Co. increased its business by $1 billion “amid the credit crunch as borrowers returned to traditional lenders like insurance companies,” she wrote.
Also, “We invested record amounts in U.S. and Europe, and expanded our capabilities into Central and Eastern European markets, Asian markets such as India, Japan and China, and added a sixth fund to our Latin America platform,” she added.
But Ms. Faust of Hawkeye said, “It's very difficult to get first mortgage financing today.” Transaction activity began to slow in second half of last year and then slowed even more in the first half of this year, even for established investment managers.
Still, some managers see opportunity in the absence of credit in the markets. Three of the top 10 mezzanine managers —Shorenstein Properties LLC., GE Asset Management and Henderson Global Investors — are new to the list, and most of the top 10 in mezzanine increased assets under management.
“There is a significant amount of capital looking to raise funds to take advantage of the lack of financing,” Reznick's Mr. Farb said. “I think there has been money moving into the mezzanine space to fill the financing void. Other funds will be formed to provide debt financing for real estate transactions.”
Contact Arleen Jacobius at [email protected]
(updated with correction)