Commercial real estate investors and executives believe private equity firms will continue buying up large portfolios of properties over the next year

Commercial real estate investors and executives believe private equity firms will continue buying up large portfolios of properties over the next year, according to a survey released yesterday.

But many said deals similar to Blackstone Group’s US$39 billion purchase of Equity Office Properties would create more opportunities for those with only millions instead of billions to invest, according to the DLA Piper 2007 ‘State of the Market’ Real Estate Survey.

‘There’s obviously this large group of people now that think there’s still going to be opportunity under the radar screen of that level of deals,’ said Jay Epstien, chair of the law firm’s US real estate practice and co-chair of the firm’s global real estate practice.

The survey precedes DLA Piper’s one-day real estate summit today. The programme will feature some of the biggest names in real estate, such as leaders from Vornado Realty Trust, General Growth Properties Inc, Blackstone, Jones Lang LaSalle Inc and Starwood Capital.

About 44 per cent of the survey respondents said they believed the consolidation that has resulted from the large private equity deals would lead to more opportunities for smaller companies.

‘It’s a surprising answer,’ Mr Epstien said. ‘You would have assumed the small- to middle-market folks would have felt a lot of pressure.’

But many big private equity firms are short-term holders of real estate, buying property in bulk and selling it off in pieces. Many smaller players, in turn, buy those properties with the intention of reaping returns over a longer time-frame.

Some 24 per cent of the survey respondents - pension funds, private equity, real estate investment trust and other real estate executives - said they expected the mergers and acquisitions to create fewer opportunities and nearly 28 per cent said they expected no change.

Nearly 61 per cent said they expect private equity investors to be the most active real estate investors in the coming year, while 17 per cent said pension funds would be most active and nearly 13 per cent said foreign investors would be.

A whopping 78 per cent of respondents described their 12-month outlook for the US commercial real estate industry as ‘bullish’, up from 43 per cent in 2005.

However, the bulls and the 21.5 per cent who were bearish on commercial real estate over the next year point to the same reason for their opinions: the US economy and factors such as job growth and energy prices.

‘That just re-emphasises that the key fundamental that underpins all of this in the real estate markets is how strong is the US economy, and what’s the job growth like,’ Mr Epstien said.

For the past five years, US commercial real estate has enjoyed rapid price rises and the attention of new investors, driven by low interest rates that make borrowing relatively cheap, a swollen pool of available capital and a desire to diversify holdings beyond stocks and bonds.

With home buying becoming less attractive because of tighter lending requirements and skittish prospective buyers, 26 per cent of the investors ranked apartments as representing the most attractive opportunities.

Still, about 18 per cent ranked them as the weakest investment, perhaps because of an oversupply from the number of condominiums that may come back on the market as apartments, Mr Epstien said.

Internationally, China and India ranked one and two for markets US investors will find most attractive over the next year. With all its attention, Russia was second to last and the Middle East brought up the rear of the eight markets listed.

‘(Russia) is viewed as high risk and high reward,’ Mr Epstien said.

Source: The Business Times, 01 May 2007