Brookfield wants US$15 billion for real estate bet after stumbles

In the wake of the pandemic and rising interest rates, Canadian asset-management giant Brookfield is striving to secure $15 billion for a new real estate fund after facing setbacks in its recent property ventures. Brookfield's ambitious move involves doubling down on its traditional strategy of acquiring seemingly undervalued assets and betting on their long-term appreciation. However, recent challenges in the real estate market have put the company at the forefront of a global shakeout.

Amid a significant downturn in office values, Brookfield has defaulted on over $3 billion of U.S. commercial mortgages, relinquishing properties like two Los Angeles office towers and Manhattan's Brill Building. S&P Global Ratings downgraded its credit rating on subsidiary Brookfield Property Partners to junk status in December, citing weak office demand that could impact $2.7 billion in loans maturing through 2025.

To counter these challenges, Brookfield aims to raise $15 billion for a new real estate fund, with current progress reaching almost halfway. This fundraising effort faces skepticism due to the lingering effects of Brookfield's European acquisitions and concerns from investors awaiting capital repayment from previous funds. Interviews with industry experts suggest that the market's current environment, marked by office defaults, is impacting fundraising efforts across the real estate sector.

Brookfield's roots in real estate run deep, contributing to its current stature as the world's second-largest alternative-asset manager, managing $865 billion. While the company possesses the financial strength to weather the current turmoil, it plans to reduce its real estate holdings from approximately $24 billion to $15 billion by 2028, signaling a strategic shift.

The company's CEO, Bruce Flatt, known as Canada's Warren Buffett, remains optimistic about the value of Brookfield's high-quality real estate assets. Despite the industry's doubts and slower fundraising, Brookfield executives believe their contrarian view will ultimately prove right as they navigate through the current downturn.

Brookfield's history as a voracious buyer of real estate, coupled with its contrarian approach, sets it apart in a rapidly evolving property industry. The company's diversification into alternative energy, infrastructure, private equity, credit, and insurance has not diminished its focus on real estate. Flatt's strategy revolves around acquiring great assets with poor capital structures, capitalizing on mismanaged or over-leveraged properties.

However, challenges persist as Brookfield contends with declining office prices, driven by shifts in how buildings are used and priced post-pandemic. The company's recent acquisitions in Europe, including Ireland's Hibernia REIT, Belgium's Befimmo SA, and Germany's Alstria Office REIT-AG, have faced double-digit declines in capital value, reflecting the broader challenges in the commercial real estate market.

Despite these headwinds, Brookfield remains active in making profitable deals, such as selling a portfolio of manufactured home communities for $325 million. The company's ability to weather the storm, in part due to its embrace of non-recourse debt, positions it to navigate the current uncertainties and capitalize on potential opportunities in the evolving real estate landscape.

As Brookfield prepares to report earnings, the success of its $15 billion fundraising goal and the company's ability to adapt to the changing real estate dynamics will be closely watched by investors and industry observers alike.