NEW YORK (Reuters) - For commercial real estate investors, Brazil is a dream and Spain is a nightmare, Michael Pralle, president of real estate private equity firm J.E. Robert Cos, said on Wednesday.
“I’d avoid Spain and Italy right now, and be patient in the United States,” Pralle said at the Reuters Global Real Estate Summit in New York. “It’s going to get worse before it gets better.”
The credit crunch has walloped the U.S. commercial real estate market as borrowing costs soared and lenders have reduced the amounts they will loan. But in developing countries, a dearth of modern office and apartment buildings and shopping centers offers investors lucrative opportunities.
"The U.S. market is pretty tough right now," said Pralle, who was CEO of GE Real Estate, a division of General Electric Co GE.N, until last year.
Eight months ago he became president and chief operating office of J.E. Robert. The private equity company, one of the world's largest commercial real estate private equity firms, creates funds that invest in real estate in the United States, Europe, Latin American and Russia. It also manages real estate investment trust (REIT) JER Investors Trust JRT.N.
The firm plans to raise $3 billion to $5 billion a year from pension and sovereign wealth funds, endowments and wealthy individuals over the next several years to expand into emerging markets, Pralle said.
About 70 percent of its investments currently are in the United States, but it expects that to drop to 50 percent within three years, he said.
Earlier this week, Pralle attended a meeting organized by real estate tycoon Sam Zell and Wharton professor Peter Linneman. The 50 to 60 attendees included the heads of real estate investment units at Morgan Stanley MS.N, Blackstone Group LP BX.N and Goldman Sachs Group Inc's GS.N, as well heads of many REITs, Pralle said.
“It was clearly the most negative sentiment that I’ve ever seen at a real estate meeting,” he said.”
U.S. commercial real estate prices are off about 5 percent from this cycle’s peak last year, and many experts believe that by the time it’s all over, the plunge will be 15 to 20 percent.
Still, there is very little distress in commercial real estate as sellers refuse to do deals because they don’t need to do them. Pralle expects that in about six to 12 months, many property owners will be forced to sell as they find themselves unable to adequately refinance loans when they come due.
“What will drive the distress in real estate is really going to be the credit markets,” he said. “It’s not going to be the fundamental oversupply or lack of demand for commercial real estate. It will simply be that people can’t get same financing that they had before.”
U.S. commercial banks also are looking to rid themselves of questionable real estate loans, which may soon be buying opportunities for investors.
“There’s a lot of toxic loans on their balance sheets, and eventually they’ll be wanting to sell those, and we’ll be there as a buyer,” he said.
Office buildings in Orange County, California, may offer good buys as many sellers will be forced to sell because their tenants, many of whom were mortgage brokerage firms, have closed due to the housing collapse.
Still, he is pessimistic about U.S. shopping centers, which he said was the only type of commercial real estate that saw overbuilding in places such as Denver, Las Vegas, Phoenix and Los Angeles.
While U.S. investment opportunities will come in the form of buying other investors’ distressed loans or real estate, Brazil and Mexico offer growth, he said.
“I’m excited about Brazil because I think it’s a great emerging market with a growing middle class and great macro characteristics,” he said. “There’s not enough retail. There’s not enough housing. There’s not enough modern office space. The strategy there is simply build to meet demand.”
He is concerned about Argentina, where underlying inflation may hobble the economy, but is upbeat on Russia, which is booming. J.E. Robert has a fund geared to investment in Russia. So far, it is building five office towers outside of Moscow.
Meanwhile, some European markets are hurting.
“The sick boys of Europe right now are Italy and Spain,” he said. Residential overbuilding in Spain is dragging down other real estate markets, he said. Meanwhile, London’s office market is down. But Germany, whose real estate market has avoided large swings in prices, is stable.
Although J.E. Robert has yet to enter Asia, Pralle said Japan is the world’s best market for commercial real estate investment. Prices are still 20 percent below that of the 1990s and borrowing costs are minute.
“We will eventually be in Asia, and I think Japan will be the first place we’ll go,” he said.
Eventually, the firm will move into China, which he said will overtake the United States as the world’s largest economy within 30 years.
“This is China’s century,” he said.
(For summit blog: summitnotebook.reuters.com/)
(For more on the Reuters Global Real Estate Summit see <ID:nSP31448>)
Editing by Patrick Fitzgibbons and Phil Berlowitz
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