Hedge Funds Preparing For $1 Trillion Property Bill

Bloomberg

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Hotel values, which decline fastest during an economic downturn, can rebound rapidly as room rates are reset on a daily basis. Prices on hotels surged 17 percent in 2013, according to a preliminary reading of the Moody's/RCA Commercial Property Price Index.

The New York-based firm had more than 25 percent of its assets invested in commercial real estate at the end of December, according to a letter to investors, which showed the fund gaining 12.9 percent last year. Lippmann declined to comment on the investments.

Boaz Weinstein's Saba, a $3.9 billion investment firm started in 2009 to trade on price discrepancies between loans, bonds and derivatives, moved into mezzanine real estate lending last year, according to people with knowledge of the fund, who also asked not to be named.

The investment ties into a broader property bet for Weinstein, the former co-head of global credit trading at Deutsche Bank. His firm was one of the first hedge funds to start digging into the riskiest corners of the $550 billion commercial mortgage bond market last year by purchasing securities that are first in line to take losses from new deals.

Investment in commercial real estate debt is incr easing as sales of securities linked to properties ranging from mobile home parks to Hawaiian resorts are poised to climb to $100 billion this year after doubling to $80 billion in 2013, according to data compiled by Bloomberg.

Billionaire Paul Singer's Elliott Management Corp. is backing a venture with Silverpeak Real Estate Partners that will originate mortgages to be parceled into CMBS, as well as make other types of loans such as mezzanine debt. In a December letter to investors, Elliott cited the "strength and growth in the new issue market," and a "significant capital hole in need of filling," as boom-era loans mature.

Separate from Silverpeak, Elliott is investing $75 million for a hotel and condominium project in Manhattan, according to a person with knowledge of the deal. The preferred equity will yield between 15 and 20 percent, said the person, who asked not be named because the deal is private.

Mezzanine debt was frequently used in real estate leading up to the crash as landlords ramped up their use of borrowed money to help pay record prices for buildings. While a boon for borrowers at the time, excess leverage was at the root of some of the most disastrous real estate acquisitions.

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