The downside of public ownership
Investors and financiers in the real estate world will be wondering for some time yet just who got the best deal out of the largest ever LBO, the purchase by Blackstone of Equity Office Properties Trust, the largest owner and manager of commercial office space in the US, in a deal valued at $39 billion.
Did Samuel Zell, the self-made billionaire who started in the real estate investment business 40 years ago, out-negotiate Blackstone – which twice raised its offer to beat out competition from another listed Reit, Vornado?
Perhaps, not. Zell himself tells us that, had he owned 100% of EOP as a private company, he would not have been a seller. Clearly, he still sees value in the sector, though it’s noticeable that his recent purchases in real estate have been in emerging markets.
The deal shows that, during a bull market for real estate, private equity groups have useful advantages over publicly-quoted Reits. The ratings agencies act as a quasi regulator of Reits and get nervous when leverage exceeds 50% of asset values. Private equity groups are able to deploy much more leverage to capture value from rising asset prices. And for as long as the property markets are liquid – and they are very liquid right now – private firms can also move with great speed to turn their portfolios over without all the cumbersome governance procedures and checks required by public ownership.