Global Policy Forum

Real-Estate Redux

Originally slated for sale after the federal bailout sum was repaid, American International Group (AIG) has begun to expand its real estate business unit. The major insurance firm, which received the largest bailout of a private company in US history ($182,3 billion), is focusing on the US apartment market. AIG and others are exploiting the vacuum caused by the departure of many competitors who couldn’t find sufficient funds - an ironic side-effect of AIG’s breakdown in 2008.

By Craig Karmin and Serena Ng

April 10, 2012

American International Group Inc. is planning to jump back into U.S. property investing, reversing yearslong efforts to downsize its real-estate business in the wake of its near-collapse and government bailout in 2008.

AIG until recently had been dismantling what was once a $24 billion real-estate portfolio packed with trophy properties around the world to help pay back U.S. government loans and keep the company afloat. Its investing has been limited primarily to a few European deals with a single partner.

But now AIG is beginning to make plans for fresh investments across the U.S. that will begin later this year.

A real-estate division of the New York-based company has reached out to developers of new apartment buildings in major metropolitan areas, said people familiar with the matter.

"We've done multifamily deals with them before, and we're interested in working with them again," said Hal Fetner, president and chief executive of New York developer Durst Fetner Residential LLC who has been contacted by AIG about new developments.

AIG hasn't set specific targets on the size of its future investments in real estate, but people familiar with the insurer say that eventually it will amount to hundreds of millions of dollars annually.

The company once acquired flashy properties like a Vermont ski village, Shanghai office towers and a Tokyo shopping mall. This time, a humbled AIG has set its sights lower: The U.S. apartment market is where it is focusing now, said people familiar with the matter.

AIG was one of the financial groups that expressed interest in a $100 million development project in Montclair, N.J., a one-time Jaguar dealership that developer Pinnacle Cos. plans to convert into an apartment complex with retail, commercial and office space, said people familiar with the matter. It also has held discussions with brokers or developers in California and the Southeast U.S., the people said.

Some brokers said they first realized that AIG was paving the way to resume property investing when they found members of the real-estate team actively looking to partner with developers at a January multifamily housing conference in Boca Raton, Fla.

AIG's return to real-estate investing is another sign that the insurer is regaining its footing after paying back most of its $182.3 billion federal bailout. The company is still 70%-owned by the U.S. government, which is now largely a passive shareholder and is expected to sell its holdings over time.

Over the past year, AIG has crept back into a few businesses that it abandoned because of the financial crisis, such as securities lending, as it becomes more comfortable taking risks again. Its insurance businesses also have remained active investors in commercial and residential mortgage debt.

It also is part of a growing movement by insurance companies to raise their stakes in real estate as the market rebounds from a sharp correction. A number of big companies are moving into a vacuum caused by the departure of some investment-banking firms from real estate and by the struggle of many funds to raise money.

New York Life Insurance Co., for instance, said it made a new allocation to commercial mortgage loans and real-estate equity. That commitment could be as much as $1 billion, according to people familiar with the matter. Northwestern Mutual, meanwhile, made $1.57 billion in real-estate equity investments last year, the insurer said. That is up from $1.1 billion in 2010 and more than four times the amount made in 2009.

AXA Real Estate, a unit of French insurer AXA SA and one of Europe's largest real-estate managers with $55 billion under management, is raising money for its first two U.S. funds and expects to be investing it soon. Olivier Thoral, AXA Real Estate's head of North America, said U.S. property should account for 10% of its local real-estate portfolio within five years.

Even with industry peers turning more active as real-estate investors, AIG's return would be more of a milestone. The insurer's near demise in 2008 was a result of outsize bets on the U.S. housing and real-estate market through a derivatives unit that insured complex debt pools backed by residential and commercial mortgage-backed securities. That unit has been wound down.

AIG started its real-estate investing business in 1987 and built it into one of the world's largest property-investment platforms with $25 billion in assets at its peak a few years ago. Its real-estate team is led by Robert Gifford, a 55-year-old industry veteran who was hired in 2009, shortly before Robert Benmosche was appointed chief executive.

The global real-estate business, like many of AIG's units, was originally slated for sale after the bailout. A year ago, after the company fully repaid a large loan by the Federal Reserve Bank of New York, it turned its focus from winding down its real-estate portfolio to taking steps toward getting back into the market.

AIG's real-estate assets are currently around $9.5 billion, or a little more than a third of its peak, and it maintains a staff of 150 people.

As part of its recent sale, AIG has unloaded its limestone-clad former headquarters in lower Manhattan, a Marriott Hotel in San Juan, Puerto Rico, and about $300 million of apartment buildings, mostly in New Jersey, that it acquired near the top of the market in 2007 from Kushner Cos.

While the insurer sold its Asia real-estate funds, with $5.4 billion in assets, to Invesco Ltd. for an undisclosed sum at the end of 2010, it held on to the IFC Seoul tower and a Shanghai mixed-use project with a Ritz Carlton hotel. It continues to invest in European real estate through a venture with Lincoln Property Co.


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