UNITED STATES - The pension fund real estate industry painted a pretty negative outlook for real estate investing at the Pension Real Estate Association’s 18th Annual Plan Sponsor Conference in Chicago last week.
One of the main themes discussed at this year’s PREA conference suggested real estate values for US pension funds could drop by as much as 40%.
Mike Kirby, director of research for Green Street Advisors, said during a panel discussing public market prospects: “When I made a prediction earlier this year that the values would fall by as much as 30%, people thought I was off-base. The latest predictions are more than this.”
The general consensus at the conference was real estate managers and pension funds are unlikely going to be investing any new capital in the marketplace in the short-term.
These investors are instead likely to renovate or improve any existing properties in their portfolios rather than attempt to invest in any new assets.
This could also be the case for real estate managers who have recently closed new capital raisings as it is understood investors would prefer to wait things out until the market becomes a little more settled.
One of the difficulties managers face when trying to buy more assets is in tackling the spread of what buyers and sellers think a new asset is worth.
John Hurley, a principal with Penwood Real Estate Investment Management, said, “We just let a deal go on an industrial property in Southern California because the broker tried to raise the price at the last minute. I think buyers and sellers in many cases still can’t agree on what is the true value of a property.”
Despite the negative talk, there were a record number of 850 attendees at the conference in Chicago. This is in part because many of the industry players wanted to know what other investors were thinking given the current market conditions.
Another big topic at the conference was the liquidity crisis that now exists in the marketplace. Even if a manager has equity that could cover 50% of a transaction, it is very difficult to find a lending source to cover the balance of the transaction.
This has made it very hard for real estate investors to close on many deals so far this year. The situation is unlikely to change until the major banks are lending again and the general consensus is this will last well until next year.
This reality is likely to affect opportunity fund managers the most as many of these players have leverage of up to as much as 85% or 90% on some deals. If the debt on these deals falls due, the opportunity funds could be forced to sell some assets.