NEW YORK CITY-As investors continue their flight-to-quality in core markets, a new study shows that strong alternative opportunities exist outside the gateway cities. According to Ernst & Young’s 2011 “Global Market Outlook: Trends in Real Estate Private Equity,” now is the time for fund managers to capitalize on distressed deals--even amid an uncertain and volatile market.
“There are now signs the sector is reaching bottom, and fund managers should brace themselves for an acceleration of deals and financing activity to hit the market, albeit slowly, over the next several years,” says Mark Grinis, Ernst & Young’s global real estate leader, in a statement.
The report shows that the aftermath of the financial crisis has had a substantial impact on transaction volumes and a material impact on the amount of leverage in the marketplace and availability of debt. As a result, the property market has contracted, which leaves more room for new types of deals to emerge. “The market is much smaller in terms of the amount of equity being raised, the availability of debt financing and the number of transactions,” Grinis says.
But as the market continues to whittle down, structural and regulatory changes will also affect the way deals get done. New regulations under the Dodd-Frank Act and the Financial Accounting Standards Board will call for “new and innovative approaches” due to added budgetary costs and increased reporting. In particular, regulatory bodies are focusing on the alternative investment industry that, until now, has been lightly regulated, E&Y explains.
Howard Roth, Ernst & Young’s global real estate leader, says global investors, regulators and pension advisors are all simultaneously demanding greater transparency in governance, reporting and controls for private equity real estate. “What was previously an immature industry is starting to take on an increased element of operational maturity and is benefiting from better deployment of technology solutions,” he says, in a statement.
Overall, the report shows that CRE performance will display a gradual pick up, but no spike. “Hopefully we’ll be able to reflect back on this period as a floor and see a crescendo of deal flow and activity,” Grinis says. “The likely scenario will be a gradual build-up, making this a good time to have capital to deploy in the market.”
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