Billion dollar feeding frenzy
Over the last 18 months around $40bn (€31bn) has been invested in public-to private real estate transacations. There is every reason to believe that we will continue to see these deals, as long as large amounts of pension fund capital are either committed to real estate directly or are being raised by some of the larger real estate managers in the business.
There may be a new player in the public-to-private deal arena: the California State Teachers Retirement System (CalSTRS). The pension fund recently approved an increase in its targeted long-term allocation to real estate from 6% to 11%. One possible strategy would be to invest the new capital in public-to-private real estate transactions. The pension fund could be looking to do this with an existing real estate manager or a new manager.
Pension fund capital invested in real estate is projected to increase from its current value of $9.5bn to a projected $15.7bn in 2009 and $22bn by 2012. Many in the industry feel that public-to-private transactions would be a logical way to invest the new capital.
The CalPERS is another pension fund with some activity in public-to-private real estate deals. "We have the capacity to undertake these kinds of deals because of our size," the fund's acting senior investment officer for real estate Al Fernandez points out. "We think there will be further such transactions in the future."
Pramerica Real Estate Investors is one of several real estate managers that has an interest in public-to-private real estate deals. In the autumn of 2005, it participated in a deal to take private some of the office building assets of real estate operating company Prentiss Properties.
Its managing director Robert Falzon notes: "We are expecting more deals like this in the future. One of the main reasons for this is that it would be very difficult to assemble a large portfolio by acquiring properties one at a time - this would take a long time and would miss half the increase of the net operating income which we expect to see in high quality portfolios over the next couple of years."
Falzon does think that these deals are still very pricey. "There still isn't much difference in the cap rates for public-to-private deals versus one-property purchases," he says. "The cap rates can still be in the 5-6% range. The underwriting is banking on an increase in the net incomes as many of the markets around the country continue to show improvement."
Pramerica does have several capital sources which it could tap for public-to-private transactions. One of these is a group of commingled funds known as the Prudential Property Investment Separate Account (PRISA) funds. PRISA now has a net asset value of $7.bn. The property types in these transactions could be office, retail, apartments and self-storage.
One of the potential outcomes of all these deals is that the real estate managers could be creating some new public companies down the road. Take CS Capital Management, for example. Over the last few years the company has created a joint venture investment programme with its separate account pension fund client, Public Employees Retirement System of Idaho and the Koll Company. Its most recent transaction involved taking private all the real estate assets of REIT acquisition and development company AmeriVest Properties. All 12 properties should be acquired for $273m by year-end.
CS Capital Management has now amassed a total portfolio of around $500m for the Idaho PERS/Koll venture. Most of the assets are office buildings with some apartments. "Creating a public company is definitely something that we will be looking at for the future," says the company's managing director Paul Saylor.
"It's our opinion that there will be interest from investors wanting to place capital in publicly owned real estate. This will be true going forward as more companies are going the private route."
Saylor feels that public and private real estate deals are a good way to place capital in the marketplace. "It's not a good time now to try and buy real estate assets one at a time as there is just way too much capital chasing too few deals," he explains. "To compete with all of the other capital sources is very hard. I would prefer to try to buy a group of assets that are held by a proven public company. We are going to be looking for more public-to-private real estate transactions in the future."
Clarion Partners is another real estate manager that has some experience of completing public-to-private deals and is looking at further opportunities. It did complete one of the more significant public-to-private deals last year when it purchased Gables Residential Trust for $2.8bn. "This was an important deal for us as it allowed as to give some of our existing pension fund clients some new exposure to apartments and bring in some new investors to our company as well," explains Clarion's managing director Stephen Cordes.
Cordes does expect to see more public-to-private deals in the future. He said: "As long as the strong capital flows continue to happen with real estate, these kinds of deals will still be part of marketplace down the road. We would hope to be one of players looking for these deals. The property types that we would be taking a look at include public companies that own retail and office."