Lender wariness signals peak for REIT buyouts

By Jonathan Keehner

NEW YORK (Reuters) - A pullback in commercial property lending has raised questions about whether a recent surge in real estate investment trust buyouts signaled a peak for private equity funds.

Acquisitions such as Blackstone Group's BG.UL $23 billion purchase of Chicago-based Equity Office Properties (EOP) in February sent property prices soaring on talk of more such deals to come, particularly for office REITs.

But valuation and credit concerns have undermined lender confidence in commercial real estate, threatening private equity firms' strategy of funding takeovers by flipping properties soon after completing a deal.

A recent rise in benchmark interest rates has also threatened to slow a broader leveraged buyout boom -- which accounts over a third of all U.S. takeovers so far this year.

Increasingly critical to financing purchases like that of EOP are commercial mortgage backed securities, but growing wariness about underwriting CMBS could impact REIT buyouts.

"It will likely be felt in the multiple property flips that come with some big M&A deals, such as in EOP where assets may get traded several times," said JPMorgan Real Estate co-head Steven Schwartz.

Within weeks of closing, Blackstone sold much of EOP's portfolio to the likes of Irvine Company 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.

Blackstone then recouped about $20 billion for the parts of EOP it sold, according to analysts.