The wind blew unusually strong down the Boulevard de la Croisette during the first day of MIPIM. In the morning, around 60 major institutional investors, including some of the biggest sovereign wealth funds and some of Europe’s largest pension funds, congregated inside a transparent tent on the beach in Cannes.
They were treated to a preview talk by veteran economic and social theorist and political adviser professor Jeremy Rifkin. And while he spoke, somewhat soberingly, of the “biggest crisis” we have ever faced – climate change – the wind rattled outside and the heat ratcheted up inside in what was effectively a mini greenhouse in the Mediterranean sun. It was as though the elements were reinforcing Rifkin’s sentiment.
The global real estate market is worth $326trn – “the good news”, he quipped. The bad news is it responsible for 40% of carbon emissions. Although the worst news was that “we are going to have retrofit every single building all over the world” – not to meet net-zero targets, but to adapt the coming physical effects of climate change. The real estate that stands today was not built for the extreme weather of climate change and cities will need to become “ephemeral”, responding to mass migration patterns and to adapt to changing bioregions. The climate, it seems, does not care for national borders.
Climate change was just one of a litany of risks currently labouring the minds of institutional real estate investors. Causing more immediate jitters was the collapse of Silicon Valley Bank, which quickly developed into a banking crisis involving the rescue of Credit Suisse.
During the same week that MIPIM was held in 2008, US investment bank Bear Stearns collapsed, preceding by a few months the fall of Lehman Brothers and the triggering of the global financial crisis. It was no surprise then the headlines about bank failures added a tinge of apprehension to conversations.
What is certain is that the return of high interest rates is likely to come with a few surprises beyond simply higher debt costs and bond yields. It might bring into play weaknesses in the financial system and investment markets that have lain dormant during the era of lower for longer.
The real estate market is not as financially leveraged as it was in 2008. But it has entered a period of stasis with many prospective buyers but few motivated sellers. In many markets, if assets were forced to trade, they would do so at lower prices. But owners are, by and large, able to sit tight and avoid selling into a falling market. It was no surprise then to hear many investors talking about pivoting to lending, in an environment where banks are retrenching and refinancings are due.
AXA IM Alts has managed some of the biggest institutional real estate debt funds over the past decade, but in recent years had become more cautious. With interest rates on the rise and banks on the retreat, the company is looking to ramp up its activities again, according to Timothé Rauly, global co-head of real estate at AXA IM Alts.
“The market has changed dramatically,” he said. “We are starting to increase our appetite for more lending.” This could take the form of more development financing, the issuing of whole loans and potentially mezzanine debt.
Another elephant in the room – which together with climate change and banking failures, felt more like a herd – was what rising bond yields mean for real estate’s position in the world of multi-asset portfolios. For so long now, real estate – alongside various other real assets and private markets – has been lifted by an influx of capital that would have otherwise found its way into traditional fixed-income investments.
What happens to that ‘wall of capital’ that for so long has been a load-bearing feature of the asset class? The answer is yet to play out. Aldo Mazzocco, CEO of Generali Real Estate, recently suggested that a more sustainable level of capital flowing into real estate could be positive for the asset class.
One potential trump card is real estate’s theoretical ability to hedge against inflation. According to Rauly, it has been performing above expectations in this regard. Most leases in continental Europe are indexed against consumer price index (CPI) inflation. Rauly said that, in AXA IM Alts’ real estate portfolio, “tenants are absorbing this indexation quite easily”.
He said: “On top of that, in certain asset classes and certain locations, we see market rents moving faster up than inflation, which is very good news in the current context.”