"There's a significant amount of capital that has been accumulated in the distressed sector," E&Y's Gary Koster tells GlobeSt.com. "Currently valuations are pretty low peak-to-trough, probably down 25% to 40% from 2007. The problem is that there aren't an incredible number of sellers at these evaluations."

With lenders more often than not extending the terms of loans, "Nobody's forcing the issue," says Koster, global leader of real estate fund services at E&Y. "The unintended owner has always been a significant contributor to deal-flow in the distressed sector, and we don't have many unintended owners. That number of foreclosures relative to the debt that's underwater is a very small ratio."

For owners, the fact that banks are so willing to forbear, rather than foreclose or otherwise sell the note, on their current terms is "a gift," Koster says. Not only are they being given a chance to wait it out until a recovery starts driving up values again, "they're also collecting fees for managing the properties" in the meantime, he adds.

Koster describes this stasis as "a double-edged sword, because the community is not sure what it's rooting for. So it's sort of bipolar." Owners want a quick recovery, so that leasing and therefore operating income go up sooner rather than later. "But if you've accumulated all this capital to invest in distressed property, you want the complete opposite," he says.

The participant's perspective therefore "depends on where they are in their part of the investment cycle," Koster says. Since the E&Y survey was conducted among more than 100 real estate private equity sponsors and investors in the US, UK, Japan, India and China, it's fair to say that their perspective also depends to some extent on where in the world they are.

"Each specific country has a little bit of a different dynamic," says Koster. "They've all reacted to the global downturn differently and come out of it differently."

Investors are casting a keen eye toward the US, but also toward China. "And there are different risks" in China, Koster says. "They've got 7% GDP growth, but there's a risk of a market bubble. Not to mention all of the other risks associated with going into emerging markets."

While they're waiting for an uptick in buying opportunities, E&Y expects investors to bide their time. "One of the lessons we've learned in this rapid downturn is that managers go through style drift," Koster says. "They do very well in one part of the cycle and then expectations change. More capital comes into the market and it becomes harder to achieve those 20% returns. You start to drift and look further afield outside of your competency, and that's where a number of managers got burned. So in the near term, the larger percentage of fund managers are going to stick to their knitting."

To download the complete report, "Market Outlook: Trends in the real estate private equity industry 2010," click here.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.