Franklin awaits distressed property sales
LONDON (Reuters) - U.S. fund manager Franklin Templeton is looking to raise about $700 million (474 million pounds)for real estate investment this year as it braces for a flood of distressed sales from banks, its European property head told Reuters.
"We are going towards a distressed sales situation, but we're not there yet ... banks are still trying to figure out what to do with their problem assets," its managing director for European property, Raymond Jacobs, said in an interview.
The commercial property sector has been ravaged by the credit crisis causing waves of mortgage breaches, but most banks have so far been hesitant to dispose of repossessed assets due to a lack of clear market valuations, he said.
"We still need transactional evidence, which will come as soon as banks have a clear feel of what to do with the properties ... that will trigger forced sales, and when it happens we will get to a market bottom," said Jacobs.
The company's global-focused Franklin International Real Estate Fund 3 is currently raising $300 million, he said, while the Franklin Templeton European Real Estate Fund of Funds 2 will launch by year-end and target 300 million euros (269 million pounds).
HEADS IN SAND
The New York-based fund manager sees British commercial property as the most attractive among developed markets, as it has seen the sharpest drop in values in the current downturn compared with continental Europe and the United States.
The main difference in the repricing, said Jacobs, is because UK property owners such as real estate investment trusts are required to regularly provide "mark-to-market" valuations, even when no transactions have taken place.
"We haven't seen a lot of that repricing take place yet in continental Europe, partly because of a different way of valuing assets there, which is more of valuations based on transactions," said Jacobs, a Dutch national.
The current lack of transaction data in Europe has caused valuations to be higher than they should really be, he argued, comparing it to a previous European property bust two decades ago, where banks had refused to accept lower prices.
"Our hope is that it won't be in the same situation as in the late 1980s where a number of participants in the European market put their heads in the sand and hoped that this would resolve by itself," Jacobs said.
"There were good examples in markets like France and Spain where things took much longer to recover, because of inability to act by banks and distressed owners," he added.
While some real estate funds have spied rich pickings from the carnage in commercial property lending and are stockpiling cash to buy discounted debt from banks, Franklin Templeton is still waiting to see how the market plays out.
"It is the flavour of the month because currently it's much easier to put a price on the debt of something that was historically set, than it is on the value of something in the future," Jacobs said.
While the company is adopting a wait-and-see stance before investing in real estate debt funds, it has no interest in more complicated, bond-like products such as commercial mortgage-backed securities CMBS.L.
"CMBS.L does not have the control element of real estate investments. We are real estate investors and we like to have a certain control over the assets."
(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)
(Editing by Simon Jessop)
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