Real estate execs see merger impediments for now

NEW YORK Thu Jun 28, 2007 2:43pm 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 (UNITED STATES)

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 (UNITED STATES)

NEW YORK (Reuters) - Uncertain demand and lender wariness may hamper real estate dealmaking despite consolidation potential in several corners of the market.

Such were the sentiments expressed this week at the Reuters Real Estate Summit in New York, where executives from several businesses gave their outlook on merger activity.

"Some recent purchasers may be overextended and have taken on a little more than they can stay on top of," Howard Grufferman, vice chairman of commercial real estate advisory firm Grubb & Ellis, told the summit.

Real estate investors have been challenged by a tightening market for commercial mortgage-backed securities, a type of financing increasingly used in property deals. Wariness in underwriting these securities has followed concerns by ratings agencies over lax real estate lending practices -- potentially leaving investors struggling to finance recent acquisitions.

"This is a time when some really smart people are selling," added Grufferman, a 23-year veteran commercial broker whose clients have included Fortress Investment Group (FIG.N) and law firm Weil Gotshal & Manges.

The problem of a tougher debt market was also raised by Jones Lang LaSalle (JLL.N) Chief Executive Colin Dyer, who said buyouts of large real estate investment trusts like Blackstone Group's (BX.N) $23 billion February purchase of Chicago-based Equity Office Properties (EOP) were unlikely to soon be repeated.

"(EOP) may be the last of the big deals that gets done in this current market," said Dyer, who has headed the Chicago-based real estate services company since 2004. "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."

But both Dyer and Grufferman see broad demand for real estate exposure leading to interest in property services firms from large investment companies.

"Certainly commercial banks and investment banks have been raising their level of interest in real estate," said Jones Lang's Dyer, but he added that his firm made an unlikely takeover target due to issues of cultural fit and potential conflicts of interest.

"I'm not arguing this is an impossible scenario," said Dyer of Jones Lang being bought by a big money manager. "But it is hard for us to envisage."

HOMEBUILDER CONSOLIDATION EXPECTED

Dealmaking among homebuilders is expected, executives said at the summit, but the sector may not see the wave of buyouts that swept other real estate sectors like REITs.

"I think every homebuilder has been in conversation with LBO sorts," said Toll Brothers (TOL.N) Chief Executive Robert Toll. He added that the leveraged buyout of a homebuilder would not be surprising but thought it unlikely: "I guess we are not such great buys as to drive the LBO factories to jump in and pay premiums."

One advantage of going private would be saving time and money spent on compliance with Sarbanes-Oxley regulations -- "which are a bit of a pain," Toll said. He declined to comment on whether his company had received any buyout offers.

Toll also would not comment on WCI Communities WCI.N, a Florida-based homebuilder that is being pursued by billionaire investor Carl Icahn. Toll cited a confidentiality agreement in declining to comment on WCI -- although the reason for such an agreement was unclear as Toll has not been reported as a potential bidder for WCI.

Hovnanian Enterprises Inc. (HOV.N) Chief Financial Officer J. Larry Sorsby sees a potential for homebuilder acquisitions after slumping real estate markets start to recover.

"I would expect consolidation, not necessarily because companies are bought but also because they go out of business," said Sorsby. "I think there will be opportunities once we can clearly see that the market has bottomed."