Once in a great while, a big event can change an ecosystem forever: enter meteorite, exit dinosaurs. For the real estate world, the subprime crisis seems to be having that effect, and not only on banks. Highly leveraged private equity funds may also be moving on.

“This is really a turning point,” says Thomas Beyerle, research and strategy director for DEGI, a German real estate analytics firm in Frankfurt.

DEGI's numbers suggest that purchases by the highly leveraged buyers fell from 45% of total direct global real estate investment in the first half of the year to zero in July.

But some real estate watchers believe the big private equity funds are heading east, toward higher-yield markets. “Some of them are already going to the east, to Asia, particularly India and China,” says Hendrik Broeker, national director for corporate finance at Jones Lang LaSalle (JLL) in Frankfurt. “In the Asian markets, they are not so scared. They were not that affected by the financial crisis.”

Europe evolves

Within Europe, the departure of the buyers who made nearly half of the world's €682 billion direct real estate investments in 2006 might seem like a devastating event, but evolution is always good news for somebody.

For smaller institutional investors happy to work with only 50% to 60% leverage as opposed to the 90% or 95% favored by some private equity firms, investment conditions in some markets are looking more attractive than they have in awhile.

In Germany, for instance, the end of the private equity behemoths is likely to mean more opportunity for smaller institutional investors and Germany's open-ended real estate funds, many of whom had given up competing for properties against such giants as Fortress Investment Group and Goldman Sachs, according to Broeker. “A lot of smaller investors were frustrated because they couldn't compete with them in the bidding processes,” he explains.

Private equity may find the current market an impossible one in which to generate returns of 15% to 20%, but for buyers looking for solid, stable assets and a total rate of return of 8% to 10%, there are still some good markets in Europe, particularly Germany, according to Broeker.

Asset management's new appeal

Asset managers also seem set to profit from the market's shift. “We see a lot of small asset management companies here setting up,” Broeker says. Big players are taking note as well: JLL, for one, recently set up its own asset management office. With yields down and prices flat or falling, many investors see better management as really the only way to make more money.

“There is no other source where you can create value,” says Broeker, who estimates that a good asset manager may add as much as 3% to a portfolio's performance — especially in Germany, where such professional management didn't exist until recently.

But whoever does well in this next market, analysts are fairly sure it won't be yesterday's lords of the jungle. “The days of financial engineering are absolutely over at the moment,” Beyerle says. The days when “if you can spell ‘real estate,’ you can get the funding, those days are really gone.” And that's doubly true for large amounts. Loans of €500 million or more are almost impossible to get right now, according to Broeker.

But that may be all right, because the demand for huge portfolios also seems to be on the wane. Until recently, a favorite gambit of the big firms was to assemble, for example, a huge €1 billion-plus portfolio of German apartments, and then resell them as a single portfolio a few years later. Not anymore.

“This premium is gone, it's definitely gone,” Broeker says, “not like the way it was, where the bigger the portfolio, the higher the price.” Now, in fact, JLL is counseling companies to chop up such portfolios into more digestible €200 million to €400 million chunks.

Bennett Voyles is a veteran commercial real estate reporter and National Real Estate Investor's Paris correspondent. For questions or comments, e-mail benvoyles@yahoo.com.