'Bottom-feeding' investors drawn to US real estate in hope rates stay low
By Henny Sender in New York
The beleaguered US commercial real estate sector has been attracting a new wave of money from sources including foreign banks, US private equity firms, and a leading Chinese sovereign wealth fund.
Market participants warn that the activity represents "bottom-feeding" by opportunistic investors whose strategies could be derailed by rising interest rates. Also, the deals done so far are tiny compared with the debts that need refinancing.
Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery.
"We believe the real story is that capital is ready to buy, even though it may not be so visible today," said Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm.
Recently, state-owned China Investment Corporation has enlisted Cohen & Steers, Angelo Gordon and Morgan Stanley to identify commercial real estate opportunities, people familiar with the matter say.
A public sign of such activity came on Friday when Colony Capital won a Federal Deposit Insurance Corporation auction for $1bn of commercial property loans formerly held by failed banks in states hit hard by the real estate downturn.
The deal valued the loans at 44 cents on the dollar and was structured so the FDIC contributes $136m and holds 60 per cent of the equity, while Colony, a Los Angeles investment firm, puts in $90m for the remaining 40 per cent.
Tom Barrack, Colony founder, called the investment "an implicit bet that rates stay low" and warned: "If rates go up, everyone will be crushed."
Earlier last week, SL Green, a real estate investment trust, said it had refinanced a Times Square tower it owns with Canada's Caisse de Dépôt et Placement du Québec in a $475m deal ed by Bank of China.
In December, JPMorgan Chase raised $625m for Inland Western, a real estate investment trust, of which $500m was in the form of securities backed by commercial real estate assets.
The deal was particularly notable because it was done without help from the term asset-backed securities loan facility, or Talf, which was set up to provide financing for investors in such deals.
In all, an estimated $1,500bn to $1,800bn in commercial property debt needs to be restructured, as well as $800bn in commercial mortgage-backed securities.
