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PIMCO sees opportunity in European commercial property

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler
The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler

By Sam Forgione

NEW YORK (Reuters) - The head of PIMCO's mortgage credit portfolio management team said the firm is targeting direct commercial real estate investments and non-securitized loans, which carry greater risk but higher return potential.

Dan Ivascyn, who is also a managing director at Pacific Investment Management Co, which has $2 trillion under management, said the move by banks around the world to offload some of their debt has created opportunity to buy up unrated loans.

"Some of the more complex, illiquid areas are where we still think there is considerable value," Ivascyn told Reuters in an interview on Tuesday.

The hunt for yield and stable cash-flow streams have translated into strong returns on everything from "junk" bonds to commercial mortgage-backed securities.

Returns from investments in commercial mortgage-backed securities and other higher-yield securities have come down significantly, pushing some money managers farther afield.

For example, triple-A-rated U.S. commercial mortgage-backed securities, which are secured by loans on commercial properties, have a current yield that takes into account worst-case scenarios of about 2.4 percent, after returning 11 percent last year, according to data provided by Angel Oak Capital.

Additionally, the Bank of America Merrill Lynch US High Yield Master II index - an index of U.S. junk bonds - had a return of 15.6 percent last year, but is up just 2.7 percent so far this year.

Ivascyn sees opportunities in direct investments in commercial real estate such as malls or office buildings and non-performing loans, or loans for which payments are past due or potentially in default.

PIMCO has already made some direct investments in European real estate recently. Last December, the firm acquired five shopping centers in the UK for 95 million pounds ($144 million) in partnership with NewRiver Retail, a UK real estate investment trust, as reported by PERE news service.

"We have been gradually expanding our team and focusing on opportunities associated with global deleveraging since back in 2007," Ivascyn said.

PIMCO announced on Tuesday that it had hired Laurent Luccioni as an executive vice president and head of commercial real estate portfolio management-Europe, a new position.

Luccioni was formerly chief executive of European operations for MGPA, a private equity real estate investment firm that oversees roughly $11 billion. He will be based in London and report to Ivascyn, effective April 22.

PIMCO is a unit of European financial services company Allianz SE , and is run by founder and co-chief investment officer Bill Gross and chief executive and co-chief investment officer Mohamed El-Erian.

Ivascyn said European non-securitized bank loans are particularly attractive given debts accrued before the region's financial crisis will need to be restructured over the next several years.

"There are a lot of good loans not being made," Ivascyn said, and added that non-securitized bank paper in a variety of European countries offers "much higher" return opportunities than securitized loans.

While PIMCO is seeking private loans from both U.S. and European banks, European banks in particular have far more debt on their balance sheets, Ivascyn said. The economic uncertainty in the region and new regulations that encourage debt reduction will create fresh opportunities for loan purchases in coming years, he added.

Although PIMCO remains cautious on Europe and believes its growth will be weaker than that of the United States, the return advantages will outweigh the risks, Ivascyn said.

He said there are more opportunities in the private debt market than in the commercial mortgage-backed securities market, although some CMBS still offer fair value.

"We think CMBS valuations are fair versus other credit sectors, ever so slightly attractive in a world where return expectations, I think, need to come down," he said.

(Reporting by Sam Forgione; editing by Jennifer Ablan and Leslie Adler)

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