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Many of you have asked me to either eliminate or reduce the use of links in this column. I forgot that in my last post and have copied the excellent article about the MIPIM Summit which appears on the website of Real Estate Publishers and was written by REP Senior Editor Bernd Struben.
The exclusive event drew a full house of top investors from around the world. The interactive format between the panel and the invitation-only audience was kept on track by moderators Steve Felix, Head of Real Estate Client Relations-North America, Aviva Investors, and Janice Stanton, Senior Managing Director, Cushman & Wakefield. The panel comprised Peter Reilly, Managing Director, JP Morgan Asset Management, Hans op ‘t Veld, Head of Real Estate, PGGM, Joe Valente, Head of Portfolio Management, Allianz Real Estate GmbH, and Dietrich Heidtmann, Managing Director, Morgan Stanley.
Does anybody really know what time it is?
With the world economy sagging and real estate taking a big hit everyone is looking for advice. REP’s MIPIM Summit 2009 topics included: rebuilding confidence in the real estate industry; what the best plans are given the current market situation; the right price for risk; how to decide between debt and equity when the yield on debt can exceed that on equity; examining when the bottom will be reached; and asking if people think enough outside the box?
When the audience of top industry executives was polled on when they expect the recovery to commence, no one raised their hand for 2009, most expected the first half of 2010, and about a quarter voted for the second half of 2010. When the audience was asked their expectations for the value loss from peak property prices in 2007 to the eventual trough the majority expected a loss of 30-50%, while none thought it would be less, and a few expected an even greater loss in values.
Peter Reilly, Managing Director, JP Morgan Asset Management: “Following the last two to three years of very aggressive growth we’re looking at a major change in the next few years. Operating in a no-growth environment the focus will be on individual properties and working closely with the tenant. In the near term the focus will return to trying to add value to the existing portfolio, and there will definitely be a switch back to mature markets and reducing risk throughout the portfolio. There is no pressure to invest today; we’re only making acquisitions selectively where they make very good sense.
By and large investors have lost a huge amount of equity. Right now they are reluctant to commit until they are sure we have hit bottom. They prefer to wait until 3-6 months after we’ve hit bottom to reenter the market. Investors are shell shocked, in a cash defensive position. But in 2012-2014 inflation from all of the mounting government debt is going to kick in, so property will become very attractive. In the mean time a lot of debt needs to be restructured; a lot more needs to be done to bring confidence back in the system. It’s going to be back to the people who really know what they’re doing and can stick it out for a few years.”
Hans op ‘t Veld, Head of Real Estate, PGGM: “The REIT market has seen a wild ride over the last two years. The volatility is quite high. Right now there is a gap between the direct markets and the REIT markets, and the question is, whose pricing is right? We’re quite worried about the whole deleveraging process that’s going on. We’re more interested in well capitalized companies; capital has become quite expensive. In the last few years the game to play was yield compression. The question is, was that a sensible thing to do, particularly in the smaller markets with so much capital pouring in?
On the investor side the UK, US, and Singapore have probably hit bottom in terms of sentiment. My concern is with continental Europe; I don’t think the acceptance is there yet. The realization is still to come that rents are going to be what they were. We’re adapting and learning a lot. Looking forward things look quite attractive. Inflation will be back, and we can get our hands on assets we really like.
Trust is wonderful to have with investors, but evidence is even better. You’ll see more scrutiny in the future.”
Joe Valente, Head of Portfolio Management, Allianz Real Estate GmbH: “We have a mandate to grow over the next few years, but there is no pressure to buy immediately. Our overall strategy places a lot of focus on the core markets, but we are also interested in the distressed markets. The priorities are where you think the greatest opportunities are. There is no overall answer as to when the bottom will be reached. It will be different in different markets, different in London than in other cities. The big issue in our markets is the debt overhang, the debt rollover. This may make real estate lag behind the macro economic recovery; investors may ask for higher returns. We’re looking at five to 10 years to unravel the debt, but there are lots of opportunities. There’s an 8% yield in London, which looks great until you realize rents are going to fall 50%, so then you have a yield of 4%. And then you currently have a 5% yield in Bucharest, which just doesn’t make sense.
For the first time in the entire cycle people are learning the value of fundamentals. It’s a great time to be an equity player. It’s about the asset; it’s about understanding the local market. Now is the time to talk to major players about grade-A assets, because those will be the first to go.
The goal is finding the ideal combination of a distressed loan but not a distressed asset.”
Dietrich Heidtmann, Managing Director, Morgan Stanley: “The reasons why people went into real estate in the first place are still valid. I haven’t met anyone who is reconsidering their involvement in real estate. But the benefits of having a globally diversified portfolio have been less clear in the last 24 months, so people have started to refocus on their home markets, a more domestic focus even though there are still great cross-border opportunities.
Today investors with capital know the value of that capital. To be successful today in raising a fund you have to start with investor feedback and know what they’re looking for. The typical fund of ‘here, this is what we’re doing’ is not effective today. Communication is the key with today’s investors.”
Janice Stanton, Senior Managing Director, Cushman & Wakefield: “There is an interesting interplay between greed and fear in the markets. The US has lost 4 million jobs and vacancy rates will still go up. If you can hang in there and be selective, there are some incredible buying opportunities coming up in the next few years.
We’re seeing the reemergence of local players. In smaller deals of under 25 million, certain people can do this entirely with equity; they’re seeing the yields and stepping in.”
Steve Felix, Head of Real Estate Client Relations-North America, Aviva Investors: “There are and will continue to be opportunities in the US, but capital has become more conservative than it has ever been. Experience is a premium.
The past five years were actually extraordinary, but since they’re the recent past, we think of them as normal.
It’s very important for senior people in General Partnerships to visit the investors. That makes the investors feel comfortable that you’re on the job and know what you’re doing, and people will pass this on.”