Jones Lang chief sees peak in REIT buyouts

NEW YORK Tue Jun 26, 2007 3:28pm EDT

Colin Dyer, president and chief executive of Jones Lang LaSalle Inc., speaks at the Reuters Real Estate Summit in New York June 26, 2007. REUTERS/Brendan McDermid

Colin Dyer, president and chief executive of Jones Lang LaSalle Inc., speaks at the Reuters Real Estate Summit in New York June 26, 2007.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - The wave of massive buyouts in real estate investment trusts may have peaked as a strategy of funding real estate takeovers by flipping properties soon after completing a deal comes under pressure, according to the head of Jones Lang LaSalle (JLL.N).

Colin Dyer, chief executive of the Chicago-based real estate services company, told the Reuters Real Estate Summit in New York that acquisitions like Blackstone Group's (BX.N) $23 billion purchase of Chicago-based Equity Office Properties (EOP) in February were unlikely to soon be repeated.

"(EOP) may be the last of the big deals that gets done in this current market," said Dyer. "We believe that is trending down in favor of smaller, more contained and more detail-evaluated transactions."

Within weeks of closing, Blackstone sold much of EOP's portfolio to the likes of Irvine Co and Maguire Properties MPG.N. Many of these sales fetched record prices, justifying the $40 billion including debt that Blackstone paid to win a bidding war with New York REIT Vornado Realty Trust (VNO.N).

Critical to financing REIT buyouts like EOP has been a feverish appetite for securities like commercial mortgage backed securities, which grew over 20 percent to top $200 billion in U.S. issuances last year.

But criteria used to underwrite these offerings is becoming more stringent, said Dyer.

"There is a generally more cautious level of underwriting by debt institutions into the real estate markets which is the same thing that you are seeing in the private equity markets in general," said Dyer.

Underwriting wariness come as rating agencies have expressed concern over lax real estate lending practices and rising benchmark interest rates threaten to slow the broader leveraged buyout boom -- which accounts over a third of all U.S. takeovers so far this year.

"There will simply be fewer very highly leveraged bidders because of movements in interest rates," said Dyer. "Levels of debt typically being applied to deals are not as high -- maybe 5 to 10 percentage points of the total deal off from where they were -- and that debt has a higher price attached to it."

"There was a lot of market momentum covering any errors or margins for error," said Dyer of the previous coupling of low interest rates and rising rents. "The evaluation of the underlying fundamentals of the real estate played a secondary role to questions of what a portfolio is worth or how the market valued it."

In a tighter credit environment, Dyer sees purchasers eschewing the practice of flipping properties in favor of holding longer.

"In a market where asset prices are constantly rising there is obviously a play to be made in holding for a short time and repackaging and selling," said Dyer. "But the game will change further to one of if you buy piece of real estate now at still-high prices you need to be sure about how you will add value to it."