Arthur Andersen sees more than $10 billion of private equity capital moving into real estate in '95.

LOS ANGELES--(BUSINESS WIRE)--Dec. 7, 1994--Domestic and off-shore sources are anticipated to invest in excess of $10 billion in commercial real estate in 1995 through private placement transactions, a marked increase from previous years, according to the Arthur Andersen Real Estate Capital Markets Group.

"The private equity capital markets will be picking up a good portion of the momentum that the public REIT (real estate investment trust) market lost at the start of the fourth quarter of 1994," said Robert E. Davis Jr., firmwide managing director of Andersen's Real Estate Capital Markets Group.

"We've identified more than 50 major capital sources that have made commitments to invest heavily in real estate through private placements, some of whom have already started making their plays. Despite the recent turmoil in the public REIT markets, billions of dollars will continue to flow into the equity capitalization of real estate during 1995."

The increase in capital invested in private placement real estate transactions is driven by a variety of factors. According to Davis, the most important are: a broad-based perception that real estate has bottomed out; that anticipated returns from real estate investment are viewed as relatively attractive from a portfolio asset allocation perspective; and the opportunity funds that fueled the REO and loan portfolio bulk sales market are now looking for new ways to invest their capital.

Today, the equity capital generally can be divided into two groups: the High Cost and Moderate Cost of Capital Funds.

The High Cost of Capital Funds are represented by investment banks, money managers, hedge funds and LBO firms interested in high-risk, highly structured real estate company or portfolio transactions between $25 million and $250 million. These firms are looking to achieve internal rates of returns in the 20-30+ percent range on their investments over a one- to four-year time frame.

The Moderate Cost of Capital Funds are characterized by the long-awaited re-entry of the larger domestic and foreign pension funds and insurance companies interested in more straightforward, stabilized investments. This group's targeted investments are expected to be smaller, ranging between $10 million and $100 million with targeted internal rates of return in the 12-17 percent range over a five- to 10-year time frame.

A variety of multi-million dollar equity private placements in 1994 suggest that the private equity capital markets are beginning to heat up. Some specific examples include: Alaska Retirement Fund's investment in Corporate Property Investors, a large private retail REIT; the Goldman Sachs Whitehall Fund's investment in Hillman Properties (Northwest); J.P. Morgan/J.W. O'Conner's Argo Fund's investment in Trizec; Spieker Properties' private placement of preferred stock with a high net worth family; Harvard Endowment's investment in National Housing Partners; and Leon Black's Apollo Fund's pending investment in Crocker Realty.

"The deterioration of the arbitrage pricing between Wall Street and Main Street has also played a major role," added Davis. "Right now, public REITs are facing increasing competition from the private sector. In certain circumstances, publicly traded REITs cannot acquire new properties without negatively affecting the yield to their common stock shareholders."

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