Is the latest round of M&A a signal?
Real estate is often said to be a long-term, buy-and-hold asset class for institutional investors. But the success of investments invariably comes down to getting the timing right.
The 10-year anniversary of Lehman Brothers has served as an unavoidable reminder of the cyclicality of markets and economies. Now a decade without a crash, investors naturally begin to look for signals.
Capital raising has slowed – but from record highs. Hines had just beaten its fundraising target for its latest European value-add fund, raising €720m. Tristan Capital Partners is back in the market with its latest European fund and hopes to match the €1.5bn haul it made for its last fund in 2015.
Both imply investors and managers expect a supportive market environment in the short to medium term for such investment strategies. The market consensus is for an extended cycle, albeit a flat one in terms of capital value growth.
But Tristan Capital Partners is notable not only for being back on the road. It is one of a handful of fund managers that have recently sold to bigger parties, either fully or partially. The company, founded by Ric Lewis, sold a 40% stake earlier this year to New York Life Investment Management.
In July, UK real estate fund manager Lothbury Investment Management announced that it had sold a majority stake to Nomura Real Estate, providing the Japanese real estate company with an entrance to the European market.
And there have been others: Colliers International acquired 75% of Harrison Street Real Estate; Blackstone bought a slice of Rockpoint Group, and a consortium of investors acquired a minority stake of Savanna.
As Ted Leary, real estate ‘work-out’ specialist and founder of Crosswater Realty Advisors, says, he is always keeping an eye out for the next “canary in the coal mine”.
One possible canary to watch is when a number of companies sell stakes – effectively taking their chips off the table.
Paul Jayasingha, global head of real assets at Willis Towers Watson, says it is definitely a concern when there are a number of mergers and acquisitions in the market. There are often other factors involved, however, so it should not be assumed they are ‘cashing out’, he says.
For Willis Towers Watson, which advises investors, it is more of a concern for the individual fund management companies. The consultancy rates firms and any potential for change in the future – which could include a change in culture or business objectives – needs to be factored in.
Jos Short has experience in getting the timing right. The former PGIM Real Estate European CEO founded Internos Global Investors in 2008 with former Invesco Real Estate European COO Andrew Thornton. They went on to acquire the troubled GPT Halverton business in 2009 and built up a pan-European real estate fund management business. At the end of last year, the company was merged with large US investment manager Principal Global Investors.
Short says Internos had the benefit of having no legacy assets and so was untroubled by the effects of the post-Lehman downturn. It was able to build up a business and track record by effectively taking on reptutational risk without financial risk – it acquired GPT Halverton for €2, for example, giving it the infrastructure that under normal circumstances would have cost a lot to acquire.
But does Short, who timed the last market cycle well, foresee another shift? “It’s a real conundrum,” he says. “The public REITs in the UK have been positioning themselves for three years for an event that hasn’t happened yet. They have been strong net sellers and they have been worried about development, and yet these headline deals keep valuations high and this correction has not taken place.”
In fact, although everybody is cautious, the lower-for-longer consensus is prevailing, he says. “People are expecting something to happen and it’s not happening yet. Is it geopolitical? Is it [a] trade war? Is it interest rates? Is it inflation? But none of that seems to be affecting underlying real estate pricing and demand for real estate. And actually you’d say the outlook for the next 18 to 24 months feels reasonably strong.”
Even so, he does say there is always the potential for “an unknown that we’ve not thought of”. He says: “I don’t think we’ll have an event quite as catastrophic as Lehman, but who knows what that Black Swan will be.”