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Capital Markets Report: Global Capital Chasing Real Estate Deployment Close To Peaking

Also This Week: Private Real Estate Investment Funds Raise $26.6 Bil. in Q3; J.C. Penney Sells Shares to Boost Liquidity; Cerberus/Chatham Innkeepers USA Trust Financing Turned into New CMBS; AT&T Selling Off Property Assets To Finance Network Improvements; Catterton Partners Backing Three New Growing Restaurant Chains; CMBS Delinquencies Receding; REOs Trend Higher; Plus, Capital Markets Round-Up
October 7, 2013
The amount of global capital seeking to invest in real estate has risen over the first six months of this year - up by an estimated $20 billion to $340 billion according to DTZ - but the tipping point for the asset class's relative attractiveness compared to other asset classes looks to be drawing near.

DTZ’s latest assessment of global capital flows chasing real estate investments, in its biannual The Great Wall of Money report, reveals a $10 billion increase in global equity seeking deployment over the first six months of the year, to $167 billion, which reflects a 20% annual increase on mid-2012, or $28 billion.

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The continued upward trend of capital seeking investment in global real estate markets reflects a number of variables, DTZ reported, all supported by a broad improvement in economic outlook in the major economies as well as rising investor confidence as downside risks subside.

One of the most significant factors which have driven this tide of investment towards real estate, particularly in select European markets, is one which runs the risk of receding before too long: namely, sustained low bond yields.

Hans Vrensen, global head of research at DTZ, said: “With bond yields remaining low, most global property markets offer historically attractive relative returns. This attractiveness has helped funds raise an additional $24 billion in fresh capital over the last six months.”

While Vrensen’s comments explain the continued trend over the first six months of this year, the period covering the latest DTZ research, the extent to which current market dynamics endure is open to some debate.

Central bank policies such as Quantitative Easing (QE) have artificially increased the attractiveness of real estate, relative to fixed income on a relative-value basis, in the eyes of multi-asset class investors.

The large scale asset purchase program of predominantly gilts and government-backed securities increased the value of the assets purchased, which lowers their yield.

The eventual unwinding of QE in the U.S. and throughout Europe is likely to reverse this positive trend, to some extent, with bond yields once again rising, reducing real estate’s relative attractiveness, which is also expected to push out property yields, particularly in prime markets which have benefits from considerable yield compression in recent quarters.

Indeed, co-authors of the report - Nigel Almond, DTZ’s head of strategy research, and analyst Lulu Yang - pointed to this probable outcome of QE unwinding: “The current attractiveness of real estate markets globally reflects the current low bond yield environment.

“Under a scenario in which we see a stronger than expected economic recovery, we could see Central banks respond by pulling quantitative easing sooner than planned with bond yields rising more quickly. Under such a scenario2 rental growth could suffer and yields could rise towards the end of our forecast period making markets less attractive as expected returns fall. This could impact the deployment of capital and fresh equity raising.”

The three major regions which comprise the headline $167 billion in available global equity are all up over the first six months of the year, with the EMEA region coming out on top, at $66 billion, followed by the Americas at $57 billion, while Asia Pacific makes up the balance with $44 billion.

However, an increasing appetite for leverage within the Americas, relative to Europe, sees total capital chasing deployment in the US, Canada and South America leapfrog the EMEA region - with total capital chasing investment in the Americas at $129 billion, compared to Europe’s $120 billion, reflecting average leverage intentions of 56% and 45%, respectively, according to DTZ.

By: James Wallace, Finance Editor for CoStar UK

Private Real Estate Investment Funds Raise $26.6 Billion in Q3

Private equity real estate funds closed on $26.6 billion of capital in Q3 2013, pushing the total raised for the asset class in the year to $69.6 billion according to PERE.

The private equity total was raised by 49 funds globally with those focused on so-called opportunity real estate investment securing the highest amount. Such funds, which target properties in need of enhancement, raised $10.7 billion in the quarter. Debt funds collectively sourced $7.4 billion and value added funds - those that target property with specific issues to be addressed - totaled $5.2 billion.

No secondary real estate funds were closed in the quarter.

"The private equity real estate story is one of very slow recovery towards the pre-crisis levels of 2008,” said Dan Gunner, director of research and analytics at PERE. “We’re not seeing any significant shifts in terms of investment strategy or geography, just a gradual increase in fundraising year-on-year as institutional investors renew their confidence in the asset class.”

Brookfield Strategic Real Estate Partners, a fund raised by Toronto-based Brookfield Asset Management, collected the largest total - $4.4 billion for opportunity real estate investments globally. The fund exceeded its target of $3.5 billion.

Six other funds raised in excess of $1 billion in the quarter. Five of the 10 largest funds raised will focus their investment in North America.

There are currently 605 private equity real estate funds in the market looking to raise an aggregate of $224.4 billion. Of that total, roughly a third ($75.3 billion) is for investment in North American real estate.

The largest amount of capital - $74.8 billion - is being sought by opportunity funds. Value-added funds are in the market for $67.4 billion and debt funds are targeting a total of $37 billion.

PERE is only counting private equity real estate funds that held a final close in the period from July 1 to Sept. 30. “Funds raised” includes funds that have held a final close and excludes funds that have only held interim closes.

PERE is published by PEI, a specialist financial information group that publishes for the global finance and investment communities active in the alternative asset classes of private equity, private real estate, private debt and infrastructure.

J.C. Penney Sells Shares to Boost Liquidity

Troubled retailer, J.C. Penney Company Inc. sold 84 million shares of its common stock this past week at $9.65 per share raising about $810 million. The company could raise another $120 million if the underwriters exercise their option to buy an additional 12.6 million shares.

J.C. Penney has said its cash burn is accelerating faster than it expected. The same day it announced the offering, it said it would have just $1.3 billion in liquidity at the end of the fiscal year ending Feb. 1 2014, less than the $1.5 billion it had forecast in August.

Fitch Ratings downgraded its Issuer Default Ratings on J.C. Penney to 'CCC' from 'B-'. The rating downgrades reflect higher than expected cash burn in 2013. Fitch now projects cash burn of from $2.8 billion - $3 billion in 2013, a billion dollars higher than its mid-May projections.

The cash from the offering will bring J.C. Penney’s total liquidity to more than $2 billion.

However, Fitch said additional external funding may be needed in 2014.

Cerberus/Chatham Innkeepers USA Trust Financing Turned into New CMBS

After a remarkable turnaround, Cerberus Series Four Holdings LLC, Chatham Lodging Trust and other joint venture partners have received take-out financing from their $1.02 billion acquisition of 64 Innkeepers USA Trust hotels with 8,400 rooms two years ago.

The acquisition was part of New York-based Innkeepers Chapter 11 bankruptcy reorganization.

This past week, JPMCC 2013-INN Commercial Mortgage Pass-Through Certificates went to market. The deal represent the beneficial interest in a trust that holds a two-year, floating rate, interest-only $575 million mortgage loan secured by 51 of the hotel properties with a total of 6,844 keys located in 16 states.

As of July 2013, the portfolio reported an occupancy, average daily rate (ADR) and RevPAR of 76.5%, $127 and $97, respectively, compared with the portfolio’s peak performance in 2007 of 75%, $123 and $92, respectively. Overall, the portfolio’s is operating 5.3% above its 2007 performance, according to the CMBS documents.

Proceeds from the loan, along with $375 million of mezzanine debt, were used to retire existing debt ($771.4 million), fund reserves ($57.2 million), return equity to the sponsors ($98.2 million) and pay transaction/closing costs ($23.2 million).

AT&T Selling Off Property Assets To Finance Network Improvements

AT&T looks to be selling off some property assets to fund an aggressive network expansion and improvement.

Last November, AT&T said it will invest $14 billion over three years to improve the networks that deliver wireless communications, high-speed Internet access and television services.

This past week, it acknowledged that it was examining opportunities to monetize some or all of its remaining wireless towers. The acknowledgement came after Bloomberg News reported that AT&T was planning to divest its cell tower portfolio for around $5 billion.

According to Bloomberg, AT&T owns and operates approximately 10,000 towers and suggested that potential buyers include the three largest U.S. independent tower companies: American Tower Corp., Crown Castle International Corp., which is in the process of converting to a REIT, and SBA Communications.

Also this past week, AT&T sold its data center property in Waukesha, WI, for $52 million to Carter Validus Mission Critical REIT. The 142,952-square-foot property is 18 miles west of Milwaukee, adjacent to Interstate 94.

AT&T leased back the center for 10 years.

Catterton Partners Backing Three New Growing Restaurant Chains

Private equity fund Catterton Partners went on a tear this past week, making significant investments in three restaurant chains to help fund their expansions.

Bruxie, a gourmet waffle sandwich restaurant concept based in Orange County, CA, announced a capital investment by Catterton Partners, to help it expand its presence in Southern California and beyond. Terms of the transaction were not disclosed. Bruxie currently has six restaurants in Orange County and is poised for significant growth throughout Southern California and beyond.

Protein Bar, a high-growth fast-casual restaurant chain specializing in healthy, on-the-go options, also announced a capital investment by Catterton. The investment will be used to foster the expansion of the Protein Bar concept across the country. Terms of the transaction were not disclosed.

PIADA Italian Street Food, an authentic fast-casual Italian eatery based in Columbus, OH with restaurants in Ohio and Indiana, also picked up an investment from Catterton. PIADA currently has 14 locations across the Midwest, with six planned to open by the end of 2013. The company is poised for significant national expansion throughout 2014 and the years to come.

To help fund these new investments, Greenwich, CT-based Catterton sold off its investment in Mid-Atlantic Convenience Stores, a leading convenience store operator in Maryland and Virginia, to an affiliate of Sunoco Inc. Sunoco, which has a long history in the retail business, with a network of almost 5,000 sites, will operate the MACS business. Terms of the transaction were not disclosed.

CMBS Delinquencies Receding; REOs Trend Higher

The 30+ day CMBS delinquency rate declined 17bp in September, falling to 10.25%, reaching its lowest level since February 2012, according to Nomura Securities.

The decline in this month’s delinquency rate was led by a $795 million drop in 30-day delinquencies and a $625 million reduction in 90-day delinquencies. Notably, the delinquency pipeline benefitted from the resolutions of the $190 million Renaissance Mayflower Hotel in Washington, DC; and the $190 million One Congress Street loans on the property in Boston, which returned to performing this month.

Despite the decline this month, the balance of REO loans continues to trend higher.

“We expect this trend to persist as loans work their way through the delinquency pipeline, leaving the later stage components elevated,” said Lea Overby head of CMBS research for Nomura. “Year to date, the 30+ day delinquency rate has declined by 73bp, and is approaching our projection of a 9.50-9.75% headline rate by year-end 2013.”

As property fundamentals improve, delinquency rates by property type are beginning to converge, Nomura reported. The retail delinquency rate declined 22bp to 8.58% and it carries the lowest delinquency rate across the major property types by a total of 260bp.

Capital Markets Round-Up

Origin Capital Partners

, a real estate private equity firm based in Chicago, launched Origin Capital Fund II LLC, a $100 million investment fund. Employing a diversified acquisition strategy, the fund will invest in value added medical office, multifamily, office, industrial and retail properties in targeted US markets. To date, Fund II has received subscriptions in excess of $30 million. When fully committed, Fund II will consist of at least 10 assets, with no single asset accounting for more than 10 percent of the fund’s equity. Fund II has been seeded with four investment properties.
• Lux24 - a 12-story, 67-unit multifamily development in Chicago with 4,400 square feet of ground floor retail space.
• Naper Place - a mixed-use development in Naperville, IL, that features 49 apartment units leased exclusively to North Central College and 6,900 square feet of retail space.
• Kingwood - a three-story, Class A, 90,000-square-foot medical office building outside of Houston.
• Arium North Point - a 236-unit multifamily development in an affluent Atlanta suburb.


San Diego City Employees’ Retirement System

plans to make $50 million commitment to the

Torchlight Debt Opportunity Fund

IV, a closed end, opportunity fund focused on real estate debt investments in both the public and private markets. The investment strategy for the fund is to invest across the entire spectrum of debt and other interests relating to commercial real estate. Torchlight has long been active in the CMBS space as an investor in new issuances and an acquirer in the secondary market.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.

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