Friday, May 8, 2009

Private Investors Drivung Equity Market

There is money coming back into real estate investment. Funding sources that is. But make no mistake -- private investors are driving the equity market these days.

Small private equity groups are flooding the marketplace and investors are targeting cash-on-cash returns over internal rates of return, according to panelists on the equity investment session at the recent Apartment Finance Today Conference.

According to Apartment Finance Today magazine, the most active equity investors today are smaller private syndicators or funds raised more at the grassroots level in country clubs and other groups of wealthy individuals. In fact, a lot of money is being taken out of the stock market (what is left of investments there) and moved into private investments.

What is most interesting is that lenders have changed their tactics and are giving extensions. Plus the government is getting involved, says Eric Snyder a senior VP with Buchanan Street Partners, an investment management house. "I'm not sure the distress will be the level that is generally thought of." He suggests that the perception that distressed multifamily assets are going to flood the market is misplaced.

While more distressed assets may hit the market, lenders are trying a new model: "Amend, Extend, and Hope." Many of the distressed assets coming to market are on the low end. And lenders, who used to foreclose then dispose of properties, are instead moving to the above philosophy, tending to only bring to market low-end, Class C assets. Tyler Anderson at CB Richard Ellis' institutional group, says banks generally are not begging people to take these properties off their hands. Instead, they are "trying to figure out what the asset is, manage it as best they can, and sell it at the appropriate time."

Says Apartment Finance Today: "While some institutional buyers are asking for internal rates of return of more than 20 peercent over a five-year-term, the active investors today are focusing on cash-on-cash returns of between 8 percent and 12 percent."

Keep in mind this change is because cash-on-cash returns are easier to underwrite. They look at immeidate cash flow, as it works like a certificate of deposit (CD). When a bank pays a 5 percent return on a CD, it means you get 5 percent of the deposit amount. Internal rate of return (IRR) deals are more complex and underwrite for differeing amounts of annual cash flow.

The magazine piece agrees with my long-time philosophy -- Sellers should target cash-on-cash buyers, who will typically pay more for an asset than IRR driven investors.

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