Investors Focus on Distressed Real Estate for High Returns

March 26 2008 - The vultures are circling US real estate, looking for high returns and low prices amid the fallout from the housing slump and the credit crisis.

At least $30bn has been or is being raised to invest in distressed property since last August, according to Costar Group, which tracks commercial real estate transactions. “Distress right now is our biggest theme,” said a senior manager at a big Wall Street investor.

Property investors are seeking opportunities in housing and commercial developments as the housing market has worsened, forcing homebuilders to liquidate land and homes at knockdown prices. House prices in the top 20 US cities have fallen by 12.6 per cent since their high in 2006, according to the S&P Case Schiller index, leaving homebuyers cautious and causing record levels of defaults on mortgages.

There are already some early deals being done. Florida homebuilder Tarragon is doing due diligence on taking a stake in a near-$100m deal to buy more than 1,000 apartments in six locations across Florida at more than a 50 per cent discount to their value two years ago, according to Bill Friedman, its chief executive. “There is a lot of talk and a lot of people looking,” he said.

Steve Braun of JI Kaslik, a private real estate investor, said the company had been bidding for non-performing commercial mortgages, recently offering $8.5m for $16m in mortgages covering 643 apartments in Greenville, North Carolina, and Houston. It also recently bid $4.5m for a $15m mortgage on 190,000 sq ft of office space in a mixed office and apartment development in Jacksonville owned by local developer Cameron Kuhn, he said.

In November, in one of the earliest signs of the opportunities in distressed real estate, Lennar, the second biggest US homebuilder, offloaded about 11,000 home sites at a near 60 per cent discount to their $1.3bn book value to Morgan Stanley Real Estate.

Morgan Stanley and Colony Capital are among those believed to be raising funds for distressed real estate. Goldman Sachs is raising a fund, part of which may be used to invest in real estate bonds and mezzanine loans. Morgan Stanley, Colony Capital and Goldman refused to comment.

Investors focus on distressed real estate
By Daniel Pimlott | Financial Times