Real estate investment firms are taking capital off of the back burner and investing in failed banks to gain access to the real estate clogging the banks' balance sheets.
But the Federal Deposit Insurance Corp., charged with taking over failed banks, is moving at a slow simmer in disposing of those assets, causing a bubble of investment capital to form, industry insiders said.
Institutional investors had thought the managers' bank strategy might help to rescue their battered real estate portfolios. However, if more capital is raised than can be spent, the fix might end up causing more harm.
Real estate fund managers are sitting on a total of $188 billion of committed capital and are raising another $174 billion more in funds.
Their chief play right now is to buy real estate through bank acquisition.
Earlier this month, Square Mile Capital Management LLC bought a 40% stake in Specialty Finance Group, a subsidiary of Silverton Bank, Atlanta, from the FDIC after the agency took over the bank. The FDIC is keeping the remaining 60%.
“It is estimated that banks holding commercial real estate loans totaled almost $1.8 trillion, around 25% of the total loans outstanding,” noted Scott Farb, managing principal in real estate consulting and accounting firm Reznick Group PC's Los Angeles office.
Real estate investment firms worldwide had close to $200 billion in uninvested capital as of May 12, according to Preqin, a London-based research firm. They've been holding huge sums of capital for a while — as of Dec. 31, real estate investment firms had $188 billion.
On top of the mass of capital in real estate funds, some investment firms are going to institutional investors for direct investments in banks. For example, the Oregon Investment Council, Tigard, recently invested $100 million in Sageview Capital LP, which set up a bank holding company that will go out to buy real estate assets and debt. The council oversees the $51.5 billion Oregon Public Employees' Retirement Fund, Salem.
Real estate funds have time limits: typically four years to invest the capital and four years to nurture the properties and sell them. Relatively few deals were struck over past couple of years and time is ticking away.
“If they (real estate investment managers) don't find product, they don't get paid, and it's creating a desire to get more money out. We're seeing more competition for product,” said Lewis Feldman, partner/Los Angeles office chair at law firm Goodwin Procter LLP. “Demand is outstripping supply and prices are quite heady.”