A $1 trillion milestone

Real estate managers’ total assets, excluding real estate investment trusts, crossed the $1 trillion mark for the first time in sister publication Pensions & Investments’ annual survey of the largest real estate managers, but overall, asset growth ebbed slightly from the previous year.

The $1.006 trillion in assets reported by 103 real estate managers for the 12-month period ended June 30 was up 24% from a year earlier. That growth rate is 6 percentage points higher than the previous survey period.

The top 50 managers of U.S. institutional tax-exempt assets saw an increase of just 7.3% last year to $425 billion, slowing significantly from the 23% growth rate in 2006.

Overall, tax-exempt assets grew 6% to almost $468 billion, less than the 21% and 20% respective growth rates in the past two years’ surveys.

Six more managers reported real estate assets in this year’s survey, compared with last year.

During the 12 months, the NCREIF Property Index returned 9.2%. The lion’s share of the index return was generated from income of 5.3%, compared with 3.8% appreciation.

In the first half this year, properties reflected in the index appreciated less than 1%: -0.7% in the first quarter and 0.34% in the second quarter.

The top 10 managers controlled 54% of the total real estate assets reported, down from 58% in last year’s survey and 61% in 2006.

ING Clarion/ING Real Estate of New York held the top spot among real estate managers in terms of total assets, though it moved to eighth place, from seventh, in tax-exempt assets, the result of a 16% decline to $14.4 billion as of June 30. ING Clarion/ING Real Estate’s total assets under management grew 31% to $150.2 billion.

Two managers in the top 10 based on tax-exempt assets witnessed declines during the period. Assets of TIAA-CREF of New York, the top manager based on tax-exempt assets, saw an 8% decline to $42 billion, and at RREEF Alternative Investments, the asset management branch of Deutsche Bank AG of Frankfurt, Germany, which is in the sixth spot, tax-exempt assets under management declined 9% to $18.8 billion.

Tax-exempt assets under management for U.S. clients in timber and mezzanine portfolios grew the most of any categories tracked in the survey, increasing 28% to $17.1 billion and 40% to $6.1 billion, respectively. International real estate, which at 32% exhibited the most growth of any category in last year’s survey, slowed to a 14% increase this year.

Another shift from prior years is an increase of 39% of U.S. real estate assets managed for foreign clients.

STILL DESIRABLE

“Real estate is still a desirable institutional asset class in today’s market,” said Scott Farb, managing principal at Reznick Group PC of Los Angeles, a real estate consulting firm.

“It’s attractive from a long-term standpoint given today’s volatility and lack of alternative investments,” he said. “Real estate could be perceived as a safe haven to hedge against the other risks in the marketplace.”

Even so, a dramatic drop in real estate transactions meant a number of investment managers were sitting on the sidelines looking for opportunities, particularly in the distressed area, Mr. Farb said. Transactions fell about 70% during the 12-month period ended June 30.

The decline was particularly marked this year. For example, in the first half, office building sales in the Americas plummeted 76.71% to $32 billion, from the first half of 2007, according to data provided by Real Capital Analytics Inc., a New York-based real estate research firm.

Transactions in Europe also slowed, with office sales in the first half of this year down 57.61% to $43 billion. Transactions grew in Asia and in Brazil, Russia, India and China.

WAITING FOR PRICES TO DROP

Managers with capital to spend are waiting for prices to drop, and sellers that aren’t pressured to sell are staying out of the market.

“This is not an environment in which you would want to be a seller,” said Xavier Gutierrez, senior vice president of capital markets at Phoenix Realty Group LLC, a New York-based multifamily-housing investment manager.

More than one-third, or 36%, of tax-exempt assets was invested in office properties as of June 30, increasing slightly from 35.3% in last year’s survey.

Timber increased a percentage point to 3.5%, and single-family housing dropped to 0.5%, from 2.7% in 2007. Retail dropped by nearly 2 percentage points to 15.8%, while the remaining sectors were fairly stable.

A number of real estate investment firms closed funds during the period, with the second quarter among the most successful in terms of capital commitments.

According to Prequin, a London-based private-equity data research firm, $31.3 billion in real estate funds was raised in the second quarter, about the same amount that was raised in the first half of 2007. North American-based real estate investment managers alone closed a total of 24 funds with a combined $18.7 billion in the second quarter.

Although the survey period ended with a bang, overall real estate fundraising has been down, said Claudia Faust, co-founder and managing partner at Hawkeye Partners LP, a real estate private-equity firm in Dallas. Hawkeye takes stakes in real estate investment firms.

“Definitely, capital raising has slowed down,” Ms. Faust said.

Some investors couldn’t make real estate commitments because of the “denominator effect,” in which falling performance in traditional asset classes caused an overallocation to real estate. Others opted to wait until valuations dropped.

“There is a lot of capital out there, and the presumption is that there will be a number of transactions in real estate, mainly in non-performing loans, [commercial mortgage-backed securities] and residential real estate,” Mr. Farb said. “The hope is that the spigot will start to open, and there will be an opportunity to make money.”

During the one-year period ended June 30, well-capitalized managers became more attractive, said Keith B. Rosenthal, co-founder and president of Phoenix Realty.

Those investors making commitments to real estate funds were very selective, he said, and managers had to have a demonstrated track record within their niches showing their success in challenging times.

Meanwhile, the shifts in assets under management don’t always tell the whole story.

For example, TIAA-CREF’s tax-exempt assets under management were down, but that is a result of investment managers’ taking an opportunity to sell assets, firm executives said.

TIAA-CREF sold loans and securitized a $2 billion pool of mortgage loans, said Philip J. McAndrews, the firm’s managing director and head of global real estate management.

“It was not a shift out of the mortgage investment class,” he said. “We think we did very well, because at the time, spreads were tightening up, and [we] received competitive prices on the pool.”

Of the top 10 tax-exempt real estate investment managers, two had double-digit-percentage asset jumps.

General Motors Asset Management of New York increased assets 19% to $13.4 billion, and Des Moines, Iowa-based Principal Real Estate Investors LLC’s assets were up 14% to $24.6 billion.

Tax-exempt institutional assets under management at Prudential Real Estate Investors of Parsippany, N.J., rose 9% to $38.9 billion.

“During that period, [Prudential Real Estate Investors] closed a number of funds both domestically and internationally, and expanded our open-end funds, primarily the PRISA series of commingled funds, closing 2007 with a record-breaking $7.5 billion of new fundraising,” Theresa Miller, a Prudential spokeswoman, wrote in an e-mail.

What’s more, total returns across Prudential Real Estate’s portfolios increased its assets under management by $3 billion during the one-year period ended June 30, Ms. Miller wrote. Prudential’s commercial-mortgage-lending subsidiary, Prudential Mortgage Capital Co., increased its business by $1 billion “amid the credit crunch as borrowers returned to traditional lenders such as insurance companies,” she wrote.

Also, “we invested record amounts in U.S. and Europe, and expanded our capabilities into Central and Eastern European markets, Asian markets such as India, Japan and China, and added a sixth fund to our Latin America platform,” Ms. Miller wrote.

But Ms. Faust said, “It’s very difficult to get first-mortgage financing today.” Transaction activity began to slow in the second half last year and then slowed even more in the first half this year, even for established investment managers.

Still, some managers see opportunity in the absence of credit in the markets. Three of the top 10 mezzanine managers — San Francisco-based Shorenstein Properties LLC, GE Asset Management of Stamford, Conn., and Henderson Global Investors of Hartford, Conn. — are new to the list, and most of the top 10 in mezzanine increased assets under management.

“There is a significant amount of capital looking to raise funds to take advantage of the lack of financing,” Mr. Farb said.

“I think there has been money moving into the mezzanine space to fill the financing void,” he said. “Other funds will be formed to provide debt financing for real estate transactions.”

Arleen Jacobius is a reporter for sister publication Pensions & Investments.