In fact, debt-related concerns comprise three of the top strategic priorities cited by fund managers in E&Y's 2009 Market Outlook--Trends in the Real Estate Private Equity Industry report. The top five include: refinancing maturing debt, raising capital for a new real estate fund, property/portfolio sales, obtaining acquisition financing and deleveraging the portfolio.

"It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs it appears, there is still very little, if any, lending taking place in the real estate industry right now," says Koster, head of E&Y's real estate fund services practice, in a release. "Our survey suggests that fund sponsors are not obtaining non-recourse financing on new deals."

Fund managers are also concerned about valuations, the survey says. Specifically, capitalization rates for stable income-producing commercial properties in the US are expected to continue expanding this year furthering the value declines experienced in 2008. Of the fund sponsors surveyed, 41% indicated that cap rates would increase by up to 100 basis points with another 33% of respondents indicating that cap rates would increase by more than 100 basis points.

Says Koster, "Two years ago, values were based on peak earnings at peak multiples in 2007. Today our survey suggests that values this year may reflect declining earnings at depressed multiples."

He adds that the increasing cost of capital is largely to blame for the decline in values to date in the commercial property sector, which have been amplified by the amounts of excessive debt leverage. "The great concern for 2009 is declining real estate fundamentals and their impact on net operating income," Koster says.

The survey found 92% believe that there will be no economic recovery in the US until after 2009. Says Koster, "The upside to a market with severe liquidity constraints and depressed asset values is that the outlook for investing in distressed assets is becoming increasingly attractive. Fund sponsors are scrambling to raise capital to build up their war chests in order to take advantage of what may be the best buying opportunities in decades."

The full survey can be accessed on Ernst & Young LLP's website at http://www.ey.com/realestate .

Instant Insights /

E&Y: Dislocation and Volatility Expected to Continue in '09

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