Appetite for Risk in Private Real Estate Grows, Survey Says

Private real estate investors have grown increasingly bullish about the future of the market and are ready to embrace more risk, a study by Preqin has shown.

(July 7, 2011) – A Preqin survey of alternative investment consultants has revealed that investors are looking to embrace riskier private real estate opportunities.

A full 72% of those surveyed intend to advise their clients to invest more or significantly more capital in private real estate than in 2010 and only 9% said they would recommend a smaller allocation. Those surveyed also indicated a greater preference for riskier opportunistic, distressed, and value added funds over less risky core and core-plus funds.

Over 70 alternative investment consultants from around the world participated in the study.

Geographical considerations colored the responses, with 68% surveyed saying that North America will present the best investment opportunities in the coming year and 50% believing that Asian private real estate will be attractive. The consultants surveyed were less bullish on the European and South American private real estate markets, with only 38% and 35% respectively saying that the regions would offer good opportunities in the next year.

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Preqin asked the survey participants to rank different fund types on a scale of 1—5, with one being the least attractive and five being the most attractive. Riskier funds scored best, with opportunistic funds given a 3.7 and value added and distressed strategies both receiving a 3.6. Core and core-plus strategies got a ranking of 2.6 and 3.0 respectively.

“It is possible that consultants believe core properties have become overpriced due to demand for high quality assets following the downturn,” the survey said. The indicated preference for riskier strategies suggests that private real estate investors will become more eager to stomach risk.

Recent moves by asset owners into real estate underscore Preqin’s finding. Norway’s $584 billion sovereign wealth fund announced July 5 that it was purchasing $1 billion of Paris property from French insurer AXA. That investment followed up on the SWF’s decision in 2010 to invest $722 million for a 25% stake in the UK Crown Estate’s Regent Street properties in London.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

State and federal regulators have ordered JPMorgan to pay $228 million in a settlement of allegations that the bank's securities division rigged the market for municipal bond derivatives.

(July 7, 2011) — Following JP Morgan’s announcement that it would pay millions to settle US regulatory claims that it misled pension funds and other investors, the bank — the nation’s second largest by assets — is now set to pay $228 million to settle a bid-rigging case.

According to the US Securities and Exchange Commission (SEC), JP Morgan Securities LLC (JPMS) will pay $228 million to various government regulators and states to settle allegations that it rigged almost 100 transactions involving municipal-bond auctions.

“JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal ‘last look’ at competitors’ bids,” said Robert Khuzami, Director of the SEC’s Division of Enforcement in a statement. “Municipal issuers and investors didn’t stand a chance against the fraudulent strategies JPMS and others used to guarantee profits.”

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “When powerful financial institutions like JPMS conspire with each other to intentionally violate regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted. Rather than playing by the rules, the rules got played.”

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The regulator claims that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations, and omissions undermined the competitive bidding process and influenced the prices that municipalities paid for reinvestment products. Furthermore, the regulator claims that the bank’s alleged dishonesty deprived certain municipalities of a presumption that the reinvestment instruments had been purchased at fair market value. “JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted,” the SEC said in a release.

In a statement, the New York-based bank said it doesn’t “tolerate anticompetitive activity or violations of law.” Additionally, the bank stated that it aided in the investigation and is working with regulators to “further strengthen its compliance programs in the public finance business.”

According to the Wall Street Journal, the bank said its net total in payment is $211.2 million: $51.2 million to the SEC; $50 million to the Internal Revenue Service; $35 million to the Office of the Comptroller of the Currency; and $75 million to the states involved.

This is not the first time the SEC has settled with a financial institution stemming from its ongoing investigation into corruption in the municipal reinvestment industry. The SEC charged Bank of America Securities in December 2010 with securities fraud for similar conduct. In May, the SEC charged UBS Financial Services Inc. (UBS) with securities fraud for fraudulently rigging bids as both a provider and a bidding agent.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742