"There's a significant amount of capital that has beenaccumulated in the distressed sector," E&Y's Gary Koster tellsGlobeSt.com. "Currently valuations are pretty low peak-to-trough,probably down 25% to 40% from 2007. The problem is that therearen't an incredible number of sellers at these evaluations."

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With lenders more often than not extending the terms of loans,"Nobody's forcing the issue," says Koster, global leader of realestate fund services at E&Y. "The unintended owner has alwaysbeen a significant contributor to deal-flow in the distressedsector, and we don't have many unintended owners. That number offoreclosures relative to the debt that's underwater is a very smallratio."

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For owners, the fact that banks are so willing to forbear,rather than foreclose or otherwise sell the note, on their currentterms is "a gift," Koster says. Not only are they being given achance to wait it out until a recovery starts driving up valuesagain, "they're also collecting fees for managing the properties"in the meantime, he adds.

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Koster describes this stasis as "a double-edged sword, becausethe community is not sure what it's rooting for. So it's sort ofbipolar." Owners want a quick recovery, so that leasing andtherefore operating income go up sooner rather than later. "But ifyou've accumulated all this capital to invest in distressedproperty, you want the complete opposite," he says.

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The participant's perspective therefore "depends on where theyare in their part of the investment cycle," Koster says. Since theE&Y survey was conducted among more than 100 real estateprivate equity sponsors and investors in the US, UK, Japan, Indiaand China, it's fair to say that their perspective also depends tosome extent on where in the world they are.

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"Each specific country has a little bit of a different dynamic,"says Koster. "They've all reacted to the global downturndifferently and come out of it differently."

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Investors are casting a keen eye toward the US, but also towardChina. "And there are different risks" in China, Koster says."They've got 7% GDP growth, but there's a risk of a market bubble.Not to mention all of the other risks associated with going intoemerging markets."

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While they're waiting for an uptick in buying opportunities,E&Y expects investors to bide their time. "One of the lessonswe've learned in this rapid downturn is that managers go throughstyle drift," Koster says. "They do very well in one part of thecycle and then expectations change. More capital comes into themarket and it becomes harder to achieve those 20% returns. Youstart to drift and look further afield outside of your competency,and that's where a number of managers got burned. So in the nearterm, the larger percentage of fund managers are going to stick totheir knitting."

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To download the complete report, "Market Outlook: Trends in thereal estate private equity industry 2010," click here.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.