Starwood Capital’s Sternlicht Expects U.S. Deal Share to Shrink

Starwood Capital Group LLC, the buyout firm founded by Barry Sternlicht, expects U.S. real estate to decline to about 55 percent of its new deals from 85 percent in the past two years as European opportunities rise.

“Europe will become a much bigger portion of what we do, and we will put money out in Brazil, and we’re tinkering with some stuff in India because there’s nobody left there to compete with,” Chief Executive Officer Sternlicht said today at a conference in New York. “For the emerging markets it’s a development play and for the developed markets it’s more of an acquisition play.”

Sternlicht said he’s “worried about the world,” as investors chasing yield offer cheap loans, and fast-growing China, India and Brazil try to slow growth to curb inflation. Starwood Capital, based in Greenwich, Connecticut, expects the U.S. economy to grow less than 3 percent this year even after stimulus efforts and is using less leverage to lower risk.

“There’ll be many things to do in Europe because they’re way behind the U.S. banks in clearing their balance sheets off,” Sternlicht said. “Having said that, all of us are nervous about the growth of Europe” because of national debt problems in Greece and other countries.

Low interest rates are creating “unnatural capital flows into assets across the world,” Sternlicht said. Hedge funds and buyout firms are increasingly investing in distressed commercial real estate debt, competing for deals with Starwood Capital and other more property-focused groups.

Japan’s ‘Psyche’

Starwood Capital is avoiding Russia, Africa and Japan, Sternlicht said. The firm recently closed its office in Japan, which once delivered Starwood’s highest returns.

“They don’t like our money now, the banks favor them,” Sternlicht said. “We saw a change in their psyche even before the earthquake and tsunami, that they really wanted to lend to the Japanese companies and not to us. I fundamentally don’t believe in the market.”

He said Japan’s “small growth” in 2006 and 2007 was “really the industrialization of China, and they basically built out the infrastructure of a competitor that’s knocked them off.”

Sternlicht spoke at New York University’s International Hospitality Industry Investment Conference.

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