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Market outlook: mixed reviews

The 2007 Ernst & Young Real Estate Private Equity Market Outlook painted a rosy picture of private equity real estate fundraising, but GPs who attended a breakfast meeting unveiling the results of the survey had mixed reviews on the investment climate.

The Ernst & Young 2007 Real Estate Private Equity Breakfast, held at the New York Cornell Club on October 11, drew a good showing of general partners, all clutching opaque plastic portfolios containing the results of E&Y's annual Real Estate Private Equity Market Outlook.

The report, a survey of 285 private equity real estate funds, showed that capital flows to real estate were strong through the first half of 2007, with the total amount raised by private funds set to exceed the amount raised in 2006. Gary Koster, head of Ernst & Young's real estate fund service practice for the Americas, presented the results of the survey.

But those present at the event had mixed feelings on the real estate market going forward. Conversation soon worked its way to the aftermath of the credit crisis and its effects on the real estate market.

A quick poll by Koster of GPs at the event was telling: When asked whether they agreed that investment interest in real estate funds would dissipate, the crowd was split almost evenly. The usually most pressing concern of fund managers, sourcing deals at reasonable prices, seems to have given way to a new concern on a possible economic recession and the impact on market fundamentals.

Commenting on the frothiness of the market, Koster pointed to a comment from one private equity real estate firm participating in the survey, which had said the “winning bid of 2007 was a triumph of dumbness.”

There was little to be overly gloomy about, however. It was generally agreed that with investment coffers full and the level of re-commitment high (the quest for consistent track-records was “addictive,” according to one survey respondent), the market slowdown may very well be just another blip in the cycle.

Even with the still-to-be-seen effects of the credit crunch on everyone's minds, the numbers are reassuring. With the level of fund equity set to reach a record high by the close of the year, investors seem poised to take advantage of opportunities that present themselves, come what may.