Ex head of GE Real Estate bullish on CMBS

By Ilaina Jonas

NEW YORK (Reuters) - Pervading fear in the capital markets has driven down bonds backed by commercial real estate loans to levels where they now present an enticing investment, said Michael Pralle, the former head of GE Real Estate.

"There are already opportunities in real estate debt markets today," said Pralle, who left General Electric Co (GE.N) in June and became president and chief operating officer of JER Partners, a private equity real estate investment management firm, in October.

"I saw in JER an opportunity to continue to build a global business but to do it in a more entrepreneurial, flexible, small environment," he said in an interview on Friday.

JER buys equity or debt in commercial real estate that looks cheap or in which JER can use its expertise in operating real estate to boost the value. It also funds developments,

JER is "opportunistic," seeking riskier investments with return rates of 13 percent to 15 percent.

"I tried to persuade the (GE) team to go in to Russia," he said. "I was unable to do that."

JER's $325 million Russia fund, which backs development projects in the country, can expand to about $1 billion in buying power through the use of debt.

The firm has $11.2 billion in assets under management -- $2.9 billion in Europe, Russia, Ukraine and Georgia and $8.3 billion in North America. It is entering Latin America.

It invests for U.S. pension funds, U.S. endowments, European financial institutions, Middle East sovereign wealth funds and rich individuals.

Lately, JER has been buying U.S. commercial mortgage-backed securities (CMBS), whose spreads -- yields above either benchmark swaps or treasury rates -- have widened by unprecedented margins.

The fatter the spread, the greater investors' perceived risk of not getting stated returns. Although a AAA-rated CMBS has never posted a loss, spreads have widened to more than 300 basis points from about 25 within a year.

"It's the hedge funds that are momentum investing," Pralle said. "They don't, for the most part, have a deep understanding of real estate. They just see nervousness. They just see lack of liquidity. I don't see any justification for spreads being as wide as they are today from a credit-risk standpoint."

The firm has closed on a $230 million U.S. debt fund with Calpers. Half of that already is invested and, with leverage, the fund potentially could expand to about $1 billion of buying power. JER also invests in distressed debt through its mortgage real estate investment trust, JER Investors Trust JRT.N.

"I'm comfortable now going long in CMBS today. Even if (spreads widen) I'm getting a very nice yield on my paper," he said.

The fund plans to hold the bonds three to five years, and possibly longer for some.

At GE Real Estate, Pralle took three publicly traded UK property companies under GE's wing, seeing that their stock was priced much less than the value of the underlying real estate.

"We see a similar situation in the UK today, and I think we're likely heading to a similar situation in the U.S.," he said. "I'm not sure we're there yet in the U.S."

(Editing by Braden Reddall)