The Millionaire Factory’s Macquarie Office Trust yesterday added another $1.2 billion worth of American real estate to its portfolio – just as the world’s greatest real estate investor, according to Fortune magazine, goes about selling off his US holdings. The Macquarie deal is just one more in a series of US real estate plays by the bank and its competitors continue to churn out projects into which superannuation funds can be sunk. Its timing though is a little unfortunate for anyone who reads Fortune.

The latest edition says Tom Barrack is quitting his US investments “as prices drive the market to nosebleed levels.” He likens the current real estate market to a game of polo.

“I feel totally safe playing polo on a field full of pros,” says the bronzed 58-year-old. “But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don’t know when to hold back.”

It’s the same with US real estate right now. “There’s too much money chasing too few good deals, with too much debt and too few brains.” The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.

Barrack runs Colony Capital which has some US$25 billion in international real estate ranging from the Raffles Hotel chain and Japan’s Fukuoka Dome to Resorts International, the United States’ largest private gaming company. He has averaged a 21% return for the past 15 years, but now casinos are the only US real estate he’s interested in buying.

He sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. “They’ve driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5% or 6%,” says Barrack. “That’s too low.”

Macquarie Office Trust is no amateur, but it is operating in an international market suddenly awash with buyers. Barrack isn’t the only investment professional complaining about a touch of irrational exuberance in real estate – and it’s not just in the US market.

According to the chief of one of Australia’s most successful superannuation funds, some relatively small but highly leveraged property trusts are pushing down yields here to questionable levels. The level of borrowings means any hiccup with tenants could mean serious trouble for the trusts.

Wonder if they know much about polo.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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