Colony's Barrack says Real Estate will have low returns; workouts/restructuring "exhausting"

Real estate investors will have to work even harder just to achieve single and low-double digit returns, according to Colony Capital founder Tom Barrack.

Barrack spoke today exclusively with PERE following widely reported comments this week that he finds real estate to be “tiring and boring”. Barrack said the comment was intended to highlight a market changed by the credit crisis, in which “the fast guys looking for fast money” are now a thing of the past.

The report had caused some head-scratching among real estate market insiders, who privately questioned whether Barrack was signalling less enthusiasm for the asset class.

However in the interview, Barrack said that his commitment to real estate has never been stronger. “Ninety-nine percent of our assets are in real estate, and 100 percent of my life has been real estate,” he said.

Barrack insisted that amid an era of low interest rates, relaxation of mark-to-market accounting rules, and so-called extend and pretend debt refinancings, real estate had come down to “single and doubles” returns, with “no outsize returns and no velocity”.

“The reality of life is that returns for real estate for the foreseeable future are going to be ordinary not extraordinary,” Barrack said, noting that this view excluded Asia, the Middle East and South America.

As such, he added, there was really only one game in town – with debt the new equity and real estate the new value-add. However, Barrack warned that debt workouts, recapitalisations, restructurings and discounted payoffs were “exhausting”.

“It’s real work,” he said, explaining that for complex, securitised loans in particular an investor could face up to 100 bondholders invested in just one mortgage but “all with different agendas testing waterfall schedules and rules that have never been tested before. All this restructuring is going very slowly,” he said. “Its hand-to-hand warfare and it’s happening at the asset level itself.”

Colony this week closed its second portfolio of loans from the US banking regulator, the Federal Deposit Insurance Corporation, paying $445 million for 1,660 mortgages. The firm, in a venture with the Cogsville Group, agreed to pay 59 cents on the dollar for the portfolio, which has a face value of $1.85 billion and includes loans from 22 failed banks. Unlike many US banks holding real estate assets, the FDIC was the only willing large-scale seller. Instead, Barrack said, many private equity real estate firms were having to search for opportunities among the borrowers themselves.

The Colony founder predicted that inflationary pressures would eventually create more demand for real estate in the US. Once that happened, the “currency of choice will be hard assets”, he said.

“We cannot keep running a $1.5 trillion deficit and printing money to spend our way out of problems without some effect. Money will return to US assets and my instinct is that, for the most part, real estate will return to a very solid 10 percent,” Barrack said, adding that this would “create select opportunities for opportunistic players.”

The rise in demand is “not around the corner”, he said. “It could be three to seven years out.”

Barrack said the private equity real estate industry had been “spoiled by incredible outsized returns fuelled by high octane growth”, but “no-one had anticipated the power of zero interest rates and how you can hold [onto real estate] for a long, long time.”

The wave of deleveraging that was expected to hit commercial real estate globally didn’t happen as it did in the residential sector, he added, meaning too many people were “eeking along”.

Blackstone Real Estate Fund recovers from 46c lows to 85c

The Blackstone Group’s real estate operations, which has about $10 billion in dry powder, has come out of the global financial meltdown “fully intact and stronger than ever”, said the firm’s chief Steve Schwarzman during an earnings call Thursday.

In a mark of turning fortunes, Blackstone’s sixth global opportunity real estate fund, which was raised in 2008 “at the top of the market”, was valued at 85 cents on the dollar and “likely will be in excess of a dollar by year-end if current trends continue”, Schwarzman said. The $10.9 billion Blackstone Real Estate Partners VI was being carried at about 46 cents just last year, he said.

Recovery in the real estate portfolio has to do with a recovery in the broader markets, especially in hospitality and an increased demand for “high-quality office assets … in select markets where we happen to be highly concentrated”, Schwarzman said.

The firm also had been able to improve portfolio operations and restructure debt, he said. Overall, Blackstone had “reduced, refinanced or extended over $52 billion of portfolio company debt since the beginning of 2009”, Schwarzman said.

Revenue from Blackstone’s real estate operations soared in the second quarter, climbing to $208.5 million, compared with losses of $18.9 million in the second quarter of 2009. Revenues increases were driven by improved operating performance and projected cash flows across real estate, the firm said in a statement.

Blackstone’s net return for real estate in the second quarter was 17 percent, compared to negative 20 percent in the second quarter of 2009.

The firm spent $643.8 million of limited partner capital in the second quarter, up from $231.5 million in the same period last year.

http://www.perenews.com/article.aspx?article=54846

Only $30bn raised by Private Equity Real Estate Funds in 2009

PERE reports that -

With just $30.4 billion of capital raised for value-add and opportunistic private equity real estate funds in 2009, it’s fair to say fundraising in the past year was austere.
Compared to the peak of 2007, when global fundraising efforts corralled more than $85 billion, 2009 was down by roughly two-thirds. Even judged against 2005 standards, 2009 fundraising for closed-ended, commingled property vehicles was no bonanza. In 2005, when PERE first started collecting data, GPs raised some $37.4 billion in capital commitments.

No question, the past year was a humbling one for all concerned. And managers are craving fresh funding. According to PERE data, there are currently more than 240 real estate equity funds in the market trying to raise capital.

The major issues being that investors are less enthusiastic about the commingled fund model citing lack of liquidity and control; and a movement towards direct investments and separate accounts for specific investments.

The market for fund raising for real estate funds remains difficult and it is unclear how the model will develop in 2010